HLIB Research

PP 9484/12/2012 (031413)

IOI Properties Group Bhd (BUY, EPS )

INDUSTRY: NEUTRAL COMPANY INSIGHT

March 4, 2014 Price Target: RM3.85 () Share price: RM2.60 Sean Lim slim@hlib.hongleong.com.my +603-2168 1161 KLCI Expected share price return Expected dividend return Expected total return Share price
(RM) IOIPG (LHS) 3.50 3.00 2.50 2.00 1.50 1.00 Jan-00 May-13 90 Jul-13 Sep-13 Nov-13 Jan-14 110 100 KLCI (RHS) 120 (%)

Six key re-rating catalysts

Highlights

We recently met with management to obtain some updates on its various development projects, and to seek more earnings clarity. We came away feeling more reassured than ever of its prospects, and re-iterate our view that IOIP remains undervalued at this juncture. Major projects all on-track. IOIPs Park Bo Bay @ Xiamen, China is doing well, but management concedes the operating environment in Singapore remains challenging. In Malaysia, its major launches are in the hotspots of Southern Klang Valley and Johor, and it is also developing 6.55m sft of new investment property assets. Refining our earnings forecast. Following our visit to management we have tweaked our earnings projections by making our margin assumptions more detailed. Although our FY14-15 net profit forecast is reduced by 25-34%, we remain upbeat on its earnings growth in FY15 and still opine that its 11.4x FY15E P/E is undemanding vs. big-cap peers.

1824.7 48.3% 1.7% 49.9%

Catalysts

In this report, we highlight six key re-rating catalysts: (1) Attractive upside from its Singapore and China (which are currently at the trough) exposure to trigger future rerating; (2) Strong established position as a leading township developer in Malaysia; (3) IOIP has the largest development landbank in Malaysia, injected at low land cost from IOIC; (4) More re-rating to come as it unlocks value from its property investment portfolio; (5) IOIP has the strongest balance sheet amongst property developers in Malaysia; and (6) IOIPs Syariah status is expected to be resolved in May.

Information Bloomberg Ticker Bursa Code Issued Shares (m) Market cap (RMm) 3-mth avg volume (000) Price Performance Absolute % Relative % 1M -3.7 -4.8

IOIPG MK 5249 3,239 8,421 nm 3M nm nm 12M nm nm

Major shareholders (%) Tan Sri Lee Shin Cheng EPF Summary Earnings Table
FYE 30 Jun (RM m) Revenue Reported net profit Norm. net profit Norm. EPS (sen) EPS growth (%) Norm. PER (x) FD PER (x) Net DPS (sen) Dividend yield (%) BVPS (RM) P/B (x) 2013A 1,323.3 693.6 693.6 21.4 15.5 15.8 15.8 0.0 0.0 3.2 0.8 2014E 1,394.3 559.1 559.1 17.3 -19.4 15.1 15.1 4.3 1.7 3.3 0.8 2015E 1,694.6 739.0 739.0 22.8 32.2 11.4 11.4 5.7 2.2 3.5 0.7

46.4 9.4

Risks

Has 28% exposure to China and Singapore in terms of GDV, making it sensitive to any external slowdown and forex fluctuations. IOIP currently trades at 11.4x FY15E P/E, which is undemanding vs. its fellow big-cap developers, UEM Sunrise and SP Setia (14.9x and 11.0x respectively). As we believe IOIP enjoys better growth prospects than UEM Sunrise and SP Setia, IOIP is our top pick in the large-cap space. After tweaking our earnings, our RNAV estimate for IOIP is changed slightly from RM4.45 to RM4.28. We are keeping our 10% discount to RNAV, with a new TP of RM3.85, which implies 16.9x FY15E P/E. We believe this is a fair valuation benchmark for IOIP, given that UEM Sunrise currently trades at 14.9x FY15E P/E. Moreover, we are bullish on IOIPs re-rating prospects, and opine that it deserves to trade at the upper end of the valuation range for Malaysian property developers. BUY

Comment

2016E 2,101.0 1,013.2 1,013.2 31.3 37.1 8.3 8.3 7.8 3.0 3.7 0.7

HLIB

Valuation

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Key Highlights
Brief background. IOIP originated as the property arm of IOI Corporation Bhd, and has been an active developer in Malaysia for more than 20 years now. Back in 2009, it was privatised and delisted as part of its efforts to pursue various landbank acquisitions. At the time, its key projects were Bandar Puchong Jaya and Bandar Puteri Puchong in Klang Valley, and Bandar Putra Kulai in Johor. The transformation since delisting. We note that IOIP was a very different company four years ago, being fairly illiquid back then with a much smaller market cap as compared to now (RM1.5-2bn prior to delisting). From 2009-2013, the property division oversaw rapid expansion both locally and overseas. Today, IOIP has a net asset base of RM11.0bn (Dec 2008: RM3.3bn) and a greatly enlarged asset base. This includes 14,000 acres of development landbank in Malaysia, Singapore and China, close to 7,000 acres of plantation land in Malaysia earmarked for future development and 2.65m sft of NLA within its investment property portfolio. In comparison, we note that as of its 2008 annual report, the old IOIP had just 6,300 acres of development land in total. Proven management team. We like IOIPs strong and proven management team. Mr Lee Yeow Seng, the youngest son of Tan Sri Dato Lee Shin Cheng, has been appointed as the CEO. He holds an LLB (Honours) from Kings College, London and is ably supported by his experienced team of managers who have been long-serving staff in the IOI group prior to the demerger. Mr Teh Chin Guan is Property Director, and previously held various senior positions in Berjaya Land Bhd before joining IOI Corporation (IOIC) in 2009. He heads the day to day operations of the property division in Klang Valley and jointly participates with the directors on business planning. Ms Lee Yoke Har is Senior GM of Marketing and Business development, having joined in 1996. She is in charge of sales and marketing for Klang Valley projects and leasing and management of part of IOIPs investment properties. Figure #1 IOIP board of directors
Experienced management team with a good track record A leading developer in Malaysia

Bigger and better now

Director T an Sri Dato Lee Shin Cheng Dato Lee Yeow Chor Mr Lee Yeow Seng T an Sri Ong Ka T ing Dr Tan Kim Heung Datuk Tan Kim Leong Datuk Lee Say Tshin
Source: Company

Designation Executive chairman Executive director Executive director Senior independent non-executive director Independent non-executive director Independent non-executive director Independent non-executive director

Four key divisions. Following the demerger exercise from IOIC, the new IOIP is now aligned along four main divisions: (1) Property development; (2) Property investment; (3) Leisure & hospitality (golf courses and hotels), and (4) Plantations. The property development and investment divisions are the key earnings drivers, collectively accounting for more than 90% of IOIPs group revenue in FY13.

Primarily focused on property development and property investment

Investment thesis
Thesis overview. We are long-term positive on IOIP based on the following key longterm catalysts: (1) Attractive upside from its Singapore and China (which are now at trough) exposure to trigger future re-rating; (2) Strong established position as a leading township developer in Malaysia; (3) IOIP has the largest landbank in Malaysia, injected at low land cost from IOIC; (4) More re-rating to come as it unlocks value from
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Six key re-rating catalysts to generate alpha

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its property investment portfolio; (5) IOIP has the strongest balance sheet amongst property developers in Malaysia; and (6) IOIPs Syariah status is expected to be resolved in May. Figure #2 Regional GDV breakdown

Malaysia remains the lynchpin

China 20% Singapore 8%

Malaysia 72%

Source: Company

Catalyst #1: Future re-rating from Singapore and China divisions

Waiting for the upcycle. One of the interesting points of IOIP is that its listing comes at a relatively low point in the Singapore and China property cycles. Currently, these two markets have minimal contribution to earnings. In Singapore, IOIP currently has five on-going projects, which have made only modest sales contributions thus far. As for China, the group has two upcoming projects, IOI Park Bo Bay and IOI Palm City, both in Xiamen of China. Following the cooling measures imposed in both countries, activity has slowed down, and thus we expect IOIP to be a direct beneficiary when the property cycle for these two markets make an eventual comeback.

Well-positioned to ride the eventual upcycle in Singapore and China

Singapore: Waiting for the recovery Singapore projects. The group entered Singapore in 2007, and embarked on highend projects in Sentosa Cove. To-date, IOIP currently has five projects in Singapore, which have made only modest sales contributions historically, as the projects are priced at a high-end range of SGD1,000-3,500 psf. However, this has changed starting in FY13, thanks to strong sales from The Trilinq @ Jalan Lempeng, which has achieved a healthy 60% takeup within 7 months of launching of Phase 1, which comprises 200 units.

Figure #3 Singapore projects

Project Cityscape @ Farrer Park The Trilinq @ Jalan Lempeng Seascape @ Sentosa Cov e Cape Royale @ Sentosa Cove South Beach @ Beach Road Total Commenced 2011 2012 2008 2010 2011 Land size (acres) 2.08 6.00 3.61 5.32 8.64 25.65 Ongoing Ongoing Completed Upcoming Ongoing Status GDV (SGD m) 403 984 1068 1992 944 5391 84% 40% 31% nm nm Takeup (%)

Source: Company

South Beach project. This 49.9%-stake JV with CDL is a mixed use development
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strategically located between Raffles Hotel and Suntec City, and is next to the Esplanade MRT station. The site is 8.64 acres and overall GDV is SGD3.4bn (RM8.5bn). The North Tower will feature office spaces (to be completed by 2015), while the South Tower will have hotel and residential portions. The residential apartments will be released for sale (SGD944m GDV) while the hotel and commercial elements will be kept in IOIPs book as investment property. The Trilinq @ Jalan Lempeng. Overall, there will be 755 units of condominium units for sale on 6 acres of leasehold land. GDV is SGD984m with the development period spanning from 2012-2017. Phase 1 was launched in July 2013, and has felt the impact of the cooling measures in Singapore, with circa 40% take-up to-date.
Slow sales from The Trilinq

Figure #4 The Trilinq and South Beach

South Beach will be a key part of the property investment portfolio

Source: Company

Sentosa Cove. IOIP entered Singapore in a big way with its luxury condominiums in Sentosa Cove, namely Seascape (GDV: SGD1.1bn) and Cape Royale (GDV: SGD2.0bn). The projects were launched in 2008 and 2010 respectively, which coincided with the Global Financial Crisis. This had a detrimental impact on the highend luxury segment, and to-date Seascape has just 31% takeup since its commencement in 2008. In response to the challenging market environment, IOIP has decided to keep the unsold units for Seascape and Cape Royale in inventory. Fortunately, IOIP has more than sufficient balance sheet strength to wait until the market cycle for the Singapore market makes its eventual comeback, and these completed units will provide full earnings contribution to its Singapore division.

IOIP can afford to keep the completed units on its books until the next market upcycle

Figure #5 Seascape and Cape Royale @ Sentosa Cove

Source: Company

Tough operating environment in Singapore. Singapore has seen eight rounds of property cooling measures, which caused homes sales in Dec 2013 fell to a five-year low, and directly caused the Singapore URA Property Price Index (Residential) to experience a marked decline from 2010 1Q (Figure #6). IOIPs projects have not been immune to the slowdown, but we note that Trilinq continues to chalk up respectable sales numbers. We see more earnings upside from the Singapore segment once the government decides to reverse some of the cooling measures.

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Figure #6 Singapore URA Property Price Index All Residential YoY%

Yoy %
50 40 30 20 10 0
Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Jun-00 Jun-03 Jun-06 Jun-09 Dec-98 Dec-01 Dec-04 Dec-07 Dec-10 Jun-12

The outlook in Singapore remains challenging

-10 -20 -30 -40

Source: Urban Redevelopment Authority

On Feb 10 , Reuters reported that Singapores central bank broadened exemptions from the debt limit for refinancing loans of home owners. Under the revised rules, a borrower will be exempted from the 60% TDSR (Total Debt Servicing Ratio) threshold in refinancing a residential property, so long as it was purchased before the introduction of TDSR rules and it is owner-occupied, the Monetary Authority of Singapore (MAS) said in a statement. However, we opine that this is a relatively minor policy tweak and it remains premature at this juncture to describe this as a shift in government policy on the property market, given that we do not believe this exemption is likely to create a boost in home sales in the near term. Any new buyer who purchased residential property after the effective date of TDSR will still be subject to the 60% TDSR threshold, while other measures such as the Sellers Stamp Duty (SSD), are far more punitive than Malaysias RPGT scheme.

th

China: Brisk sales in vibrant Xiamen Right place, right time. IOIP has two projects in Xiamen, and has gone off to a good start with Phase 1 of IOI Park Bo Bay, which was sold out within 2 months of launch. This provides us great comfort as it shows that IOIP has made a good choice to base its projects in the vibrant port city of Xiamen.
Xiamen has proven to be an ideal starting point for its Chinese operations

Figure #7 IOI Park Bo Bay and IOI Palm City

Source: Company

IOI Park Bo Bay a success. IOI Park Bo Bay is located in the Jimei district, on a 7.66 acre site with overall GDV of RMB1.8bn (RM940m). Phase 1 of IOI Park Bo Bay was launched in Nov 2013, and was a success with all 450 units taken up within 1-2 months of launch. The GDV of Phase 1 amounted to RMB800m. IOI Palm City: mega integrated development. Palm City will be a large integrated 2 development, comprising a shopping mall (120,000 m ), a 350-room 5-star hotel, 2 2 37,500 m of boutique offices and 170,000 m of high-end residences, all on a large
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Dec-13

Sep-99

Sep-02

Sep-05

Sep-08

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site spanning 43.55 acres with RMB4.9bn (RM2.5bn) GDV. IOIP has yet to fixed a launch date, but going by the strong reception for Phase 1 of IOI Park Bo Bay, we believe this project should enjoy strong demand. The group is targeting 50% PBT margin for its China projects. China on a tightening path. In China, the property sentiment has been subdued of late (Figure #8). The main cause is that property-related cooling measures remain scattered for now, but are progressively becoming tighter across the board. The property tax is currently implemented on a limited basis in Shanghai and Chongqing, and analysts are expecting policy makers to target major cities such as Beijing as well as smaller cities (source: Wall Street Journal). When it comes to down paymentrelated measures, at least 10 Chinese cities, many of them provincial capitals, have tightened local property policies since November last year, with the major cities of Shenzhen, Shanghai and Guangzhou all raising minimum down payments for second homes to 70%, from 60% (source: Bloomberg). Xiamen continues to be vibrant. However, we believe select areas in China will continue to do well. Xiamen is a thriving Tier 2 city, thanks to its busy port, industrial zones and well-developed financial services sector. Since the early 1980s, The Port of Xiamen has been one of the busiest in China. In 2011, the Port of Xiamen ranked among the top 18 ports in the world for container freight (source: Wikipedia). Therefore, we opine that IOIPs Chinese projects will continue to do well in Xiamen.
Xiamen remains one of the more vibrant markets in China

Figure #8 China Real Estate Climate

Index points 110 105 100 95 90 85

Jun-08

Jun-09

Jun-10

Jun-11

Jun-12

Oct-08

Oct-09

Oct-10

Oct-11

Oct-12

Jun-13

Feb-08

Feb-09

Feb-10

Feb-11

Feb-12

Source: Bloomberg

Catalyst #2: Leading township developer in Malaysia Strong township base in Malaysia. IOIP has circa RM10bn worth of ongoing and new township projects in the Klang Valley and Johor, making up more than 70% of its overall GDV. IOIPs local base has been built up over a period of 20 years, and its track record consists of successful self-contained townships such as Bandar Puteri Puchong, Bandar Puchong Jaya, Bandar Putra Segamat and Bandar Putra Kulai. We believe that it is the bread-and-butter township developments which will provide a strong defensive earnings base for IOIP, given: (1) Resilience of the landed township segment in Malaysia, which remains our favourite sub-segment in 2014 and over the long term; (2) Resilience of the landed township segment against cooling measures, underpinned by long-term sustainable demand for owner-occupied landed housing; and (3) Increasing scarcity of large tracts of development land in Malaysia. Numerous upcoming launches. IOIP has its plate full with many major townships to launch this year. We highlight some of the key ones which will begin to see earnings contribution from FY14-15 onwards:
IOIP enjoys a leadership position in Klang Valley and Johor

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Oct-13

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Pipeline #1: Klang Valley townships. IOIP has major tracts of valuable landbank in the Southern belt of Klang Valley, where activity has been heating up, with major players such as SP Setia (Setia Ecohill @ Semenyih), Eco World (EcoMajestic @ Semenyih) and Mah Sing (Southville @ Bangi) all being very well received by property purchasers. Even as far as Seremban, Matrix Concepts (BUY, TP RM4.49) has been progressively attracting more buyers from KL, with this demographic now making up 50% of its new house buyers. These positive developments are all in keeping with the strong trend we observe of house purchases selecting landed properties progressively further out from KL CBD, as Malaysian house buyers in general still show a strong preference for landed properties, and are willing to accept longer travelling distances which allows them to buy landed properties at more affordable prices.

Highly active in the hotspot of Southern Klang Valley

In this section, we highlight some of IOIPs key projects for Southern Klang Valley: 16 Sierra @ Puchong. This is IOIPs flagship project in Klang Valley, and has been very successful over the years. Overall acreage is 535 acres with estimated overall GDV of RM5bn. The township is now at a highly matured stage and has a balance of 100 acres remaining. Key upcoming projects include La Thea Residences and Sierra 6 Superlink. La Thea Residences is the first-ever condominium development in 16 Sierra, and will feature 16 inter-connected themed gardens, and is priced at RM600 psf. Tower A was launched in Aug 2013 and is 80% sold whilst Tower B, which came on sale after the cooling measures were announced, is 10% taken up to-date. The overall GDV is RM297m and it is expected to be completed by 2016. There will also be an upcoming landed launch come end 2014, known as Sierra 6, which will feature 217 units of superlink houses with an estimated ASP of RM1.2m. Figure #9 La Thea Residences and Sierra 6
Upcoming launches in 16 Sierra

Source: Company

Sepang townships. IOIP has 332 acres of land in Sepang, with an overall projected GDV of RM2.0bn. The two townships will be branded as Bandar Puteri Warisan @ Sepang (200 acres) and Bandar Putera Warisan @ Sepang (132 acres). Phase 1 will be launched in 3Q 2014. We like this location as Glomacs nearby Bandar Seri Saujana has done well, benefitting from the close proximity to KLIA and LCCT, which provide a captive market from the more than 10,000 employees who work there. Sepang also enjoys fast and convenient access to KL via the ERL, which takes only half an hour to reach KL Sentral. Another demand catalyst will be the upcoming Xiamen University Malaysia campus, which will be built in Salak Tinggi, about 16km from the KLIA. It is expected to be operational in Sep 2015. Bandar Puteri @ Bangi. The Bangi/Semenyih stretch represents a new hotspot that is rapidly gaining popularity with house buyers and developers. Mah Sings Southville Bangi project has enjoyed more than 80% takeup rate for Phase 1, as buyers were attracted by the affordable pricing of the location and easy access to KL CBD (30 minutes via the North South Highway, using the newly-approved direct highway interchange). IOIPs Bandar Puteri township has a projected overall GDV of RM3.0bn, with Phase 1 to be launched in 2H 2014. We understand that IOIP intends to launch 5 phases per year, each with an approximate GDV of RM200m.

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Figure #10

Bandar Puteri @ Sepang / Bandar Puteri @ Bangi

New landbank in Sepang and Bangi

Source: Company

Pipeline #2: Johor townships. Apart from Klang Valley, its other important market is the Johor market. IOIP has circa 6,000 acres of land in Johor, with its key townships th being Kempas Utama and Bandar Putra Kulai. As noted in our report dated Dec 4 2013 (Visit notes to Johor), we believe the outlook remains challenging given the high incoming supply scenario and the slew of cooling measures imposed by the government in Budget 2014. Fortunately, IOIPs Johor townships primarily comprise of landed products, which continue to enjoy resilient demand. In contrast, the outlook for high-rise projects is far more challenging, given the high degree of incoming supply, such as the 9,000-unit development by Country Garden @ Danga Bay. Bandar Putera Kulai (BPK) @ Kulaijaya. This 6,000-acre integrated township is IOIPs key development project in Iskandar Malaysia. BPK features a number of key advantages: (1) It is fully integrated and self-contained with all the key amenities such as a recreational park, schools, IOI Mall, shops and IOI Palm Villa Golf & Country Resort; (2) Strategic location BPK is 10 minutes away from Senai International Airport and Johor Premium Outlet (JPO), 25 minutes from Johor Bahru and 30 minutes from the Woodlands and Tuas checkpoints to Singapore; and (3) BPK still has,000 acres of balance landbank, and will remain a key earnings contributor for years to come. Figure #11 Bandar Putra Kulai - location map

Enjoys strong momentum in Johor

Bandar Putra Kulai a fully integrated township near to Senai International Airport

Source: Company

Kempas Utama @ Johor Bahru. Kempas Utama was launched in 2008 and is located in the Kempas-Tebrau growth corridor within Iskandar Malaysia. One of its key selling points is the lush greenery of 3.8 acres town park. This gated and guarded community is expected to benefit from the announcement by Iskandar Malaysia on the proposed rail transit system between Johor Bahru and Singapore, and the proposed
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Johor Bahru Grand Sentral public transportation hub. Figure #12 Kempas Utama - location map
Kempas Utama to benefit from the proposed JBSingapore rail transit system

Source: Company

Medini Johor. This will be a 50-storey luxury condominium development on a 6-acre site right next to Legoland (overall GDV: RM2.0bn). The project is currently being soft launched, with the official launched slated for end 2014. The pricing is likely to be in the range of RM650-800psf, which is attractive vs. the RM700-1,000 psf asking price in the Danga Bay area. We believe this project should do well, as Medini continues to enjoy exemptions from the minimum price floor ruling and should continue to fare better vis--vis the rest of Johor. Moreover, the key catalytic developments in the Nusajaya area are closely clustered in Medini, making this project highly attractive to buyers. Figure #13 IOI Medini next to Legoland
Located next to Legoland and a host of amenities in Medini

Source: Company

Catalyst #3: Large and cheap landbank, as injected from IOIC Low land cost drives margins. Historically, as the property arm of IOI Corp, IOIP has been able to enjoy strong gross development margins (56-60% for FY11-13), thanks to low land cost arising from IOI Corps converted plantation landbank. A significant on-going advantage. Going forward, we expect IOIP to continue enjoying this advantage, given that its major landbank has been injected at favourable prices from IOIC. As can be seen in Figure #14, its major landbank has been injected at below RM5 psf, with its largest tract of land in Kulai being more than 70% below market value.

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Figure #14

Low land cost for IOIP

Acres NBV (RM psf) 4.22 4.46 1.97 4.22 0.58 1.59 Mkt Value (RM psf) 14.78 7.97 3.10 4.48 1.77 3.76 NBV/MV (%) 28.5 56.0 63.5 94.2 33.0 42.3

Blessed with low landbank cost

Kulai Segamat Bahau Senai Tangkak Melaka

3,595 1,388 1,118 507 273 1,338

Source: Company

Earnings booster from low-cost landbank. IOIP has historically enjoyed gross margin of 57-61% (FY11-13), which is far superior to the 20-30% margin typical of other Malaysian developers. We attribute its superior development margin to its lowcost landbank, which IOIP inherited from its parent IOIC. Thus, we expect IOIP to continue delivering gross margin of 57-61% going forward, and to remain as one of the most profitable developers in Malaysia. Largest landbank in Malaysia. The beneficial effects of the low-cost landbank is greatly amplified by IOIPs scale, as IOIP has the largest landbank in Malaysia, with more than 14,000 acres spread across Malaysia, Singapore and China (Figure #15). Figure #15
15000

Landbank comparison
IOIP has more than landbank than any pure property developer in Malaysia

10000

5000

0 IOIP
Source: Companies, HLIB

UEMS

SP Setia

IJM Land

Sunway

Mah Sing

Catalyst #4: Unlocking value from property investment portfolio Office and retail portfolio: IOIP has circa 2.65m sft of office and retail space on its books, with an average occupancy rate of more than 70%, comprising of: (1) 1.1m sft of retail space from its IOI Mall in Puchong and Kulai, (2) 1.12m sft of office space in Puchong and Putrajaya, and (3) 415k sft of other commercial & residential spaces. This segment made up 8.0% of IOIPs group revenue in FY13. For more details, please refer to Figure #22. Over the next 4-5 years, IOIP will be developing more investment assets to add to its portfolio, totalling some 6.55m sft in new NLA (Figure #23). Leisure & hospitality portfolio currently comprises of: (1) 4 and 5-star hotels totalling 639 rooms in IOI Resort City, Putrajaya; (2) 18-hole golf courses in IOI Resort City, Putrajaya ; and (3) 27-hole golf course in Kulai, Johor. This will be further expanded with the hotel tower in its future South Beach project in Singapore (654 rooms) that is expected to come on-stream by 2015. IOI Resort City Putrajaya. This development is located just 20 minutes from Kuala Lumpur and comprises of four-star and five-star hotels and an 18-hole championship golf course developed by the group. Developments within IOI Resort City include Puteri Palma Condominiums. Future
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There is much future value to be unlocked from its property investment portfolio

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plans for this resort city include transforming it into a commercial and entertainment centre. On-going works include constructing the IOI City development, which comprises of IOI City Mall, providing a host of merchandise and services, from mid-tohigh-end to cater to a wide range of consumers. IOI Resort City will also feature two green business towers, known as IOI City Tower, which will be MSC Cybercentre status compliant, as well as a five-star hotel and IOI City Park with 7,000 car park bays. Upon the development of IOI City, the group expects its investment portfolio to increase to 1.5m sf of lettable area from IOI City Mall and 1.2m sf lettable area of office space from IOI City Tower. The leisure and hospitality segment would also expand after the completion of the 250 room five-star hotel. Figure #16 IOI City Mall and PFCC

Source: Company

Puchong Financial Corporate Centre (PFCC) is located in Bandar Puteri Puchong along the Damansara-Puchong Highway. Tower 1 and Tower 2 were completed in June 2009, and occupy a total land area of 2.86 acres with a combined lettable area of 377,000 sft. Tower 2 has successfully secured MSC Cybercentre status in May 2012. Towers 3, 4 and 5 are under construction. Puchong Financial Corporate Centre South (PFCC South) is an integrated development consisting of office suites, retail and service apartments located in Bandar Puteri Puchong. This development incorporates contemporary architecture with the use of glass, lightweight steel, structures and screening devices to bring in natural light. Green fixtures will also be implemented into the design and the commercial buildings will be Green Building Index certified. Catalyst #5: Superior balance sheet strength Has the strongest balance sheet in Malaysia. Following the demerger exercise and listing in Jan 2014, we note that IOIP has emerged with the strongest balance sheet amongst Malaysian developers: (1) Its asset size and book value (despite low land cost) is larger than its closest peers, UEM Sunrise and SP Setia (Figure #17); (2) Its landbank is larger than any other pure property developer in Malaysia (Figure #15), and should easily last the group for more than 10 years; and (3) Post-listing, net gearing stands at a very comfortable 0.01x. Figure #17
Company IOIP SP Setia UEM Sunrise

IOIPs strong balance sheet is a key re-rating catalyst

Balance sheet comparison

13,701 12,441 9,809 11,020 5,524 6,469

Assets (RM m) Equity (RM m)

Source: Companies

The time dimension. The low net gearing ratio allows IOIP to hold its new investment assets on its books, granting them more time to mature and unlock greater value. This also gives IOIP the option and ability to adopt a build-then-sell approach for some of its projects (such as 16 Sierra in the past), which in turn enables IOIP to charge premium selling prices for completed residential properties which buyers can move
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into immediately. On the Singapore front, this also means IOIP is in no hurry to sell the Sentosa Cove developments, and has time to wait for the luxury property market to make its eventual recovery. Flexibility to deal with different market cycles. One key advantage of IOIPs superior balance sheet strength is its asset base and exposure on a regional basis Malaysia, Singapore and China. Even within Malaysia, IOIP enjoys good exposure to a number of regions, with its main bases being Klang Valley and Johor, in addition to smaller landbank holdings in Melaka, Negeri Sembilan and Penang. With such strong holding power for its landbank, IOIP has the flexibility to pick and choose its launches and product mix to make the best of the current market cycles in all three countries. Catalyst #6: Full Syariah status expected in May Clarifying the Syariah compliance issue. IOIP is already a component stock in the benchmark FBMKLCI, making it an important index stock for institutional investors. However, there has been some confusion and uncertainty surrounding its Syariah compliance status. We have clarified with management that IOIP currently is not a Syariah-approved stock, but is expected to qualify as Syariah-compliant in the upcoming review in May 2014, given it already fulfils the key criteria: (1) The conventional debt to total assets ratio stands at 3.7% as of 2Q14, well below the 33% threshold; (2) The cash deposited in conventional accounts to total assets ratio is 2.4% as of 2Q14, also well below the 33% threshold; and (3) Revenue from its leisure and hospitality segment makes up just 1.8% of overall revenue as of 2Q14, which stands comfortably below the 20% threshold.
Resolving its Syariah status will add a booster to share price Strong holding power to effectively deal with all stages of the property cycle

Earnings forecast
Healthy sales momentum set to continue. FY13 was a strong year for the group, with overall sales value rising 59% yoy to RM1.35bn. The key driver was Johor, which saw its sales rise an impressive 126% yoy to RM611m, while Klang Valley sales also did well, rising 29% yoy. 1H FY14 has been even stronger, with 1H FY14 sales amounting to RM1.0bn. While IOIP is not committing to a target number for FY14 sales, we gather that IOIP will launch approximately RM2.0bn worth of projects in FY14. Of note, the 1H FY14 run-rate suggests IOIP stands a good chance of achieving RM2.0bn sales in FY14, which would require just a 17% increase from FY13 sales. We believe this is well within its reach. Figure #18 Property Sales for FY2011 to FY2013
FY2011 Units Malaysia Klang Valley Johor Penang Total Singapore The Trilinq, Clementi Total 1720 935 1406 851 111 2485 354 1704 FY2011 Sales Value (RM m) 572 282 81 935 FY2012 Units FY2012 Sales Value (RM m) 546 270 35 851 FY2013 Units FY2013 Sales Value (RM m) 707 611 32 1350

FY14 sales should easily surpass FY13 sales

Johor was the fastestgrowing market in FY13

666 969 85 1720

653 732 21 1406

966 1357 51 2374

Source: Company

Superior margins thanks to low-cost landbank. As mentioned earlier in our report, IOIP has historically enjoyed gross margin of 57-61% (FY11-13), which is far superior to the 20-30% margin typical of other Malaysian developers. This is a function of its
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low-cost landbank (Figure #14), and the benefits are further magnified by its large scale (14,000-acre landbank, including jointly-controlled entities). Balance sheet drives margins. At the same time, its large and strong balance sheet allows IOIP to be flexible in launching the optimal product mix in various regions to maximise its margins. The depth of its balance sheet also allows it to adopt a buildthen-sell approach for some of its projects, which in turn commands premium selling prices and enhances margins. Its market leadership position also allows it to set pricing in its key townships in Klang Valley and Johor. Margin outlook. We believe that IOIP should have no trouble maintaining its 60% margin for existing landbank in Puchong and Johor. However, as earnings contribution from its new landbanks in Bangi, Sepang, Singapore and Xiamen increase, we are forecasting gross margin to decline to 53% by FY16, as these newer projects would carry lower margins. Nonetheless, we note that its gross margin would still remain far superior to other developers of similar scale; the gross margin for SP Setia and UEM Sunrise is typically around 30% on a normalised basis. RM20bn launches over the next three years. IOIP is guiding to launch RM20bn worth of GDV in FY14-16, of which 49% will be from Malaysia, 38% from Singapore and 13% from China. Recurring property investment income. IOIPs existing property investment portfolio currently carries 2.65m sft of NLA, comprising mostly of retail and office spaces. We estimate that IOIP will be expanding this segment by another 6.55m sft by 2019, of which 3.0m sft alone will come from its upcoming IOI City Mall project in Putrajaya, and estimate that the revenue contribution from this segment will increase from 8.0% currently to 9.8% by FY15. Estimating FY14-15E core earnings of RM559-739m, based on annual sales assumption of RM2.0-2.5bn. Following the release of IOIPs 1H FY14 results, we have cut our FY14 forecast by 34% given that 1H14 core net profit of RM222m made up only 26% of our previous FY14 estimate. However, we remain upbeat on its FY15 earnings growth prospects (+32% yoy) and still opine that its 11.4x FY15E P/E remains undemanding vs. its big-cap peers. While management declined to provide specific earnings guidance during our meeting with them, we believe annual sales of RM2.0-2.5bn is achievable given IOIP has achieved sales of RM1.0bn for 1H FY14. We note that its unbilled sales of RM1.2bn provides slightly more than one year of earnings visibility (as compared to RM1.1bn of progress billings in FY13). Malaysia is expected to remain the core market, generating circa 70% of sales, Singapore ~20% and China ~10% from Park Bo Bay. Of note, we clarified with management that the latest ruling in China dictates that developers can only start selling their projects upon 50% completion of the main structure, which means that Park Bo Bay will have fast recognition of its sales. The same will apply for its next Xiamen project as well (IOI Palm City).

Risks
Takeup rate. Following the slew of cooling measures tabled in Budget 2014, the sentiment in the property market has become more uncertain. However, we note that select projects continue to do well, particularly the affordable landed townships. In Malaysia, IOIPs projects are predominantly landed housing, which continues to enjoy healthy demand. Singapore presents a more challenging environment, as can be seen in the somewhat slow takeup for The Trilinq. In China, IOIP has enjoyed a strong reception for Phase 1 of Park Bo Bay. All in all, we believe IOIP will be resilient throughout the various phases of the market cycle, give its low land holding cost and low gearing ratio. Interest rate hike in 2014. This will be one of the key issues to watch in 2014, as BNM is widely expected to hike the OPR this year. Our in-house economist is calling for a 25bp rate hike, subject to growth filtering through and high inflation pass-through. The key risk here would be the possibility that BNM surprises with a higher than
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expected rate hike, which would dent the already muted and uncertain sentiment of property purchasers. Another key reason why this is important is that at this point in time, we believe property investors and genuine buyers are still buying property as a hedge against inflation, and are still favouring the primary market as it provides more favourable financing terms vis--vis the secondary market, in terms of rebates, property valuations, loan-to-value ratios etc. RPGT hikes. The government has been on a tightening path over the last few years, but we believe that this risk would be less relevant for IOIPs townships, which typically cater to owner-occupiers rather than speculators.

RNAV, valuation and recommendation

An undervalued large-cap developer. IOIP currently trades at 11.4x FY15E P/E, which we note is undemanding vs its fellow big-cap developers, UEM Sunrise and SP Setia (14.9x and 11.0x respectively). We prefer IOIPs prospects and valuation over these two big-cap names, given IOIP has a more well-diversified landbank profile vis-vis UEM Sunrise, while future management direction issues continue to weigh upon SP Setia. Rewarding shareholders with dividends. Management is not committing to a specific dividend policy at this point in time, given the fairly heavy capex commitments for its on-going developments. Nonetheless, we have gathered from management that it intends to give shareholders a payout ratio in the region of 25-30%. We opine that this is realistic given its very low net gearing ratio of 0.01x. To be conservative, we are imputing a 25% dividend payout ratio into our forecasts. Hidden value from its investment properties. Of note, our current RNAV estimate has yet to factor in revaluation surplus from its investment properties. As these assets mature and enhance in value, they will accrete further to IOIPs future RNAV. In future, we foresee that IOIP will look to monetise these assets either by outright sale or via a REIT listing. RM3.85 TP for 50% upside; BUY. Following our meeting with management, we have refined our forecast and tweaked our TP from RM4.01 to RM3.85 (maintain 10% discount to RNAV), but adhere to our BUY call and positive outlook on the company. We believe that IOIP deserves to trade at the 16.9x P/E valuation that our TP implies, given its excellent balance sheet strength, diversified international exposure, sizeable landbank at low holding cost, and superior project margins. Our meeting with management further reinforces our confidence that the company is in good hands, and will deliver on its project execution and future earnings. Figure #19
Mkt Cap (RM m) UEM Sunrise IOI Properties SP Setia IGB IJM Land Mah Sing KSL YNH Property Matrix Glomac Average 9,801 8,421 7,179 3,478 4,115 2,941 815 768 1,143 785 2.16 2.60 2.92 2.58 2.64 2.08 2.11 1.86 3.78 1.08

Valuation remains attractive vs. its large-cap peers

We believe there will be a 2530% dividend payout

More future re-rating to come when its investment properties mature

Our target price implies 50% upside

Peers comparison table

Price Target (RM) 2.23 3.85 2.91 na na 2.12 2.04 1.77 4.47 1.15 +/(%) 3.1 48.3 -0.5 na na 1.9 -3.1 -4.9 18.3 6.2 HOLD BUY HOLD na na HOLD HOLD HOLD BUY HOLD Rec. EPS (sen) FY14E 11.9 17.3 18.9 16.3 21.2 20.9 88.0 12.5 50.4 18.1 FY15E 14.5 22.8 26.4 17.0 24.2 23.0 62.5 14.1 56.6 20.9 P/E (x) FY14E 18.2 15.1 15.4 15.8 12.5 10.0 2.4 14.9 7.5 6.0 11.8 FY15E 14.9 11.4 11.0 15.2 10.9 9.0 3.4 13.2 6.7 5.2 10.1 P/B (x) FY14E 1.4 0.8 1.2 0.7 1.3 0.5 0.0 0.9 2.1 0.9 1.0 FY15E 1.3 0.7 1.1 0.7 1.2 0.5 0.0 0.9 1.8 0.8 0.9 ROE (%) FY14E 8.0 5.2 7.8 5.1 11.2 23.0 19.4 6.5 28.2 16.0 13.0 FY15E 9.2 6.5 10.4 5.2 11.4 22.8 19.4 7.4 26.6 16.3 13.5 Net DY (%) 1.4 1.7 5.1 2.8 2.1 4.0 0.0 2.2 8.3 3.8 3.1

Source: Bloomberg, HLIB

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Figure #20
Project profits - DCF Klang Valley

RNAV table
NPV (RM m) @ 10% WACC

Bandar Puteri, Puchong Bandar Puchong Jay a IOI Resort, Putrajay a 16 Sierra, South Puchong Sepang Tow nships Bandar Puteri @ Bangi Klang Valley - Others Johor Bandar Putra Segamat Taman Legenda Putra, Kulaijay a The Platino Kempas Utama Bandar Putra Kulai D'Summit Plentong Land Johor - Others Penang Negeri Sembilan Singapore projects City scape (Farrer Park) The Trilinq (Jalan Lempeng) Seascape (Sentosa Cov e) Cape Roy ale (Sentosa Cov e) China projects IOI Park Bo Bay IOI Palm City Unbilled sales Inv estment properties - ex isting PFCC (Tow er 1 & 2) IOI Mall Puchong IOI Mall Kulai One IOI Square Tw o IOI Square Putrajay a Marriott Hotel Palm Garden Hotel Inv estment properties - future IOI City Mall IOI PFCC Hotel Tow er 4 & 5 PFCC IOI Resort Putrajay a IOI Resort carpark IOI City Tow er One IOI City Tow er Tw o BV (RM m) MV (RM m) 277 508 70 95 110 124 18 277 508 70 95 110 124 18

277.93 113.32 1.73 273.44 238.22 336.62 48.59

6.09 3.67 51.93 105.99 172.75 134.02 74.31 61.01 35.08 100.30

12.59 124.00 72.24 276.49

147.07 297.90 125.49 Surplus (RM m) Surplus (RM m) -

BV (RM m) MV (RM m) 130 23 130 36 199 28 28 130 23 130 36 199 28 28

Source: Company, HLIB

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Figure #21
Total Surplus Total Equity Total RNAV

RNAV table (continued)

3,090.78 10,781.55 13,872.33 3,239.02 4.28 10.0% 3.85

Shares outstanding (m) RNAV per share (RM) Dicount to RNAV Target Price (RM)

Source: Company, HLIB

Figure #22

Existing investment properties

NLA (sft) NLA rented out (sft) Average occupancy rate (%) 96% 99% 74% 37% 74% 75% 43% 90% 40% 77% 100% 73%

IOI Mall, New Wing, Puchong IOI Mall, Old Wing, Puchong IOI Mall, Kulai PFCC (Tower 1 & 2), Puchong IOI Square, IOI Resort City , Putrajay a IOI Business Park, Puchong IOI Boulev ard, Puchong Puteri Mart, Puchong IOI Mart, Kulai 37 units of bungalows, Putrajay a Restaurant, Kulai Grand Total

243,927 619,870 247,863 376,525 440,995 22,584 281,852 45,913 75,966 268,114 25,000 2,648,609

235,306 614,535 183,087 137,470 326,969 16,863 120,885 41,280 30,479 205,462 25,000 1,937,336

Source: Company, HLIB

Figure #23

Future investment properties

NLA (sft) Expected Completion

Retail Space IOI City Mall, Putrajaya (Phase 1) South Beach, Singapore IOI Palm City Mall, China IOI City Mall, Putrajaya (Phase 2) Office Space PFCC Towers 4 & 5, Puchong South Beach Singapore IOI City Tower 1 & 2, Putrajaya IOI Palm City Office, China Grand Total 500,000 500,000 1,000,000 300,000 6,550,000 2014 2015 2016 2018 1,450,000 100,000 1,200,000 1,500,000 2014 2015 2018 2019

Source: Company, HLIB

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Income statement FYE 30 Jun (RM m) 2012A Revenue 1,053.2 COGS -411.4 Gross profit 641.8 Opex 0.0 Depreciation 0.0 Finance costs -5.6 Associates 8.2 Pretax profit Taxation Minorities Reported net profit Core net profit Basic shares (m) Basic EPS (sen) Balance sheet FYE 30 Jun (RM m) Inventories Trade & other receivables Cash Current Assets PPE Investment properties Development land Total assets Shr Holder funds Total Equity Long-term borrowings Short-term borrowings Assumption metrics FYE 30 Jun (RM m) Gross margin PBT margin Net margin 756.7 -144.8 -11.2 600.8 435.8 3,239.0 18.5

2013A 1,323.3 -526.2 797.1 0.0 0.0 -41.2 7.0 904.8 -191.2 -20.0 693.6 531.9 3,239.0 21.4

2014E 1,394.3 -733.8 660.5 0.0 0.0 -26.1 0.0 745.4 -186.4 0.0 559.1 559.1 3,239.0 17.3

2015E 1,694.6 -819.6 875.0 0.0 0.0 -26.1 0.0 985.3 -246.3 0.0 739.0 739.0 3,239.0 22.8

2016E 2,101.0 -990.8 1,110.1 0.0 0.0 -26.1 101.6 1,351.0 -337.7 0.0 1,013.2 1,013.2 3,239.0 31.3

Valuation ratios FYE 30 Jun (RM m) Reported basic EPS (sen) Norm. basic EPS (sen) Norm. FD EPS (sen) Price PER (x) Net DPS (sen) Net DY (% ) NTA/ share (sen) P/NTA (x) Enterprise value EV/ EBITDA (x) ROE (% ) Net gearing (x) BVPS (RM) Cashflow FYE 30 Jun (RM m) PAT Depreciation Amortisation Working cap & others Operating cashflow Capex Investing Cashflow Issue of shares Dividends Others Financing cashflow Net cash flow

2013A 21.4 16.4 16.4 2.6 15.8 0.0 0.0 319.0 0.8 8,542.8 10.5 6.7 0.0 3.2

2014E 17.3 17.3 17.3 2.6 15.1 4.3 1.7 332.0 0.8 8,104.7 12.0 5.2 0.0 3.3

2015E 22.8 22.8 22.8 2.6 11.4 5.7 2.2 349.1 0.7 7,693.9 8.6 6.5 -0.1 3.5

2016E 31.3 31.3 31.3 2.6 8.3 7.8 3.0 372.5 0.7 7,054.0 6.2 8.4 -0.1 3.7

2013A 123.4 456.6 381.4 2,936.6 991.4

2014E 172.1 481.1 819.2 3,447.6 1,091.4

2015E 192.2 584.7 1,230.0 3,982.1 1,190.4

2016E 232.4 724.9 1,869.9 4,802.4 1,288.4

2013A 713.6 0.0 0.0 145.8 859.4 -100.0 -100.0 0 0 0 0.0 759.4

2014E 559.1 0.0 0.0 118.8 677.9 -100.0 -100.0 0 -140 0 -140.1 437.8

2015E 739.0 0.0 0.0 -44.5 694.6 -99.0 -99.0 0 -185 0 -184.8 410.8

2016E 1,013.2 0.0 0.0 -22.0 991.2 -98.0 -98.0 0 -253 0 -253.3 639.9

1,993.8 1,993.8 1,993.8 1,993.8 2,282.5 2,282.5 2,282.5 2,282.5 11,983.2 12,594.2 13,227.8 14,146.0 18,647.1 19,066.4 19,620.7 20,380.6 10,362.2 10,781.5 11,335.8 12,095.7 502.4 502.4 502.4 502.4 0.3 0.0 0.0 0.0

2014E 47.4 53.5 40.1

2015E 51.6 58.1 43.6

2016E 52.8 64.3 48.2

Quarterly financial summary FYE 30 Jun (RM m) 1Q13 2Q13 Revenue 325.9 395.2 Operating Profit 142.1 368.8 Associates Jointly controlled entities EBIT Finance costs Pretax profit Net profit Basic shares (m) Basic EPS (sen) DPS (sen) FCF/ share (sen) Net cash/ share (sen) 1.1 23.7 166.9 -10.7 166.9 112.5 3,239.0 3.5 0.0 -9.8 -1.4 1.4 8.4 378.6 -10.4 378.6 300.2 3,239.0 9.3 0.0 5.1 -1.7

Source: Company, HLIB

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Disclaimer The information contained in this report is based on data obtained from sources believed to be reliable. However, the data and/or sources have not been independently verified and as such, no representation, express or implied, is made as to the accuracy, adequacy, completeness or reliability of the info or opinions in the report. Accordingly, neither Hong Leong Investment Bank Berhad nor any of its related companies and associates nor person connected to it accept any liability whatsoever for any direct, indirect or consequential losses (including loss of profits) or damages that may arise from the use or reliance on the info or opinions in this publication. Any information, opinions or recommendations contained herein are subject to change at any time without prior notice. Hong Leong Investment Bank Berhad has no obligation to update its opinion or the information in this report. Investors are advised to make their own independent evaluation of the info contained in this report and seek independent financial, legal or other advice regarding the appropriateness of investing in any securites or the investment strategies discussed or recommended in this report. Nothing in this report constitutes investment, legal, accounting or tax advice or a representation that any investment or strategy is suitable or appropriate to your individual circumstances or otherwise represent a personal recommndation to you. Under no circumstances should this report be considered as an offer to sell or a solicitation of any offer to buy any securities referred to herein. Hong Leong Investment Bank Berhad and its related companies, their associates, directors, connected parties and/or employeees may, from time to time, own, have positions or be materially interested in any securities mentioned herein or any securites related thereto, and may further act as market maker or have assumed underwriting commitment or deal with such securities and provide advisory, investment or other services for or do business with any companies or entities mentioned in this report. In reviewing the report, investors should be aware that any or all of the foregoing among other things, may give rise to real or potential conflict of interests. This research report is being supplied to you on a strictly confidential basis solely for your information and is made strictly on the basis that it will remain confidential. All materials presented in this report, unless specifically indicated otherwise, is under copyright to Hong Leong Investment Bank Berhad . This research report and its contents may not be reproduced, stored in a retrieval system, redistributed, transmitted or passed on, direclty or indirectly, to any person or published in whole or in part, or altered in any way, for any purpose. This report may provide the addresses of, or contain hyperlinks to, websites. Hong Leong Investment Bank Berhad takes no responsibility for the content contained therein. Such addresses or hyperlinks (including addresses or hyperlinks to Hong Leong Investment Bank Berhad own website material) are provided solely for your convenience. The information and the content of the linked site do not in any way form part of this report. Accessing such website or following such link through the report or Hong Leong Investment Bank Berhad website shall be at your own risk. 1. As of 4 March 2014, Hong Leong Investment Bank Berhad has proprietary interest in the following securities covered in this report: (a) -. 2. As of 4 March 2014, the analyst, Sean Lim who prepared this report, has interest in the following securities covered in this report: (a) -.

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Industry rating definitions

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