PP10551/09/2011(028936) 13 April 2011 MALAYSIA EQUITY Investment Research Daily Strategy Chris Eng +60 (3) 9207 7677 chris.eng@my.oskgroup.com Penang The Research Team +60 (3) 9207 7688 Research2@my.oskgroup.com No More “Kiam Siap” With Penang appearing to benefit from greater local and foreign investments, we made a visit to my home state to see if the famed “kiam siap” stereotype of the typical island Penangite has changed. Visits to IJM Land, E&O and Hunza would seem to indicate that Penangites today have a greater propensity to spend, which will benefit these companies, which are in the midst of developing high end property projects and a retail mall. While E&O and IJM Land are currently Not Rated, we have a Buy call on Hunza and note that our top property sector pick, SP Setia, is also exposed to the burgeoning Penang property market. No longer “kiam siap”? Penang was in the news recently with the state receiving the most investments in 2010 among all Malaysian states worth some RM12.2bn. The PM has also indicated plans to make the state the preferred hub in the region with some 10 infrastructure projects including expansion of the airport and port as well as the 2nd Penang bridge. So we decided to pay a short visit to the island state to see if these investments are changing the psyche of Penangites, who have long been stereotyped as “kiam siap” or stingy. Based on our visits to IJM Land, E&O and Hunza Properties, we found that there indeed appears to have been a small shift in the spending patterns of Penangites. More willing to buy high end properties. While E&O mentioned that sales at their Seri Tanjung Pinang development were 50% foreign, IJM Land mentioned that 95% of sales at their Light development were to locals with the biggest group from Penang. Both these developments are premium residential projects with recent launches having prices above RM700psf. The willingness of Penanites to purchase these projects would seem to indicate that the island’s “old money” is finding new avenues for investment. More willing to open wallets for high end shopping too. Hunza’s retail mall located in the Gurney Paragon, with 700,000 sq ft of retail space, aiims to be the premier mall in Penang offering brands that are not yet available on the island. Management believes that shift in shopping pattern gives it the confidence to invest in the upper class retail mall. Benefiting from less “kiam siap” Penangites. While our visit was too short and limited in scope to confirm if there was indeed a broad change in the psyche of Penangites, we can confirm that there are pockets of the population more willing to splurge on luxury items and therefore the following companies with exposure in the higher end property development market will be amongst the beneficiaries. Stock SP Setia Price RM Target RM Mkt Cap RMm Volume ‘000 6.45 7.23 7,569.0 2,343.0 PER (x) FY1 FY2 23.4 21.9 FY0 ROE % FY1 DY % 11.9 3.4 Rel. Performance % 1-mth 3-mth 12mth 0.7 -1.0 40.2 P/NTA (x) 3.0 IJM Land 2.78 - 3,126.6 1,675.3 17.8 15.6 6.8 0.9 2.1 0.8 0.9 1.9 E&O 1.17 - 985.8 3,578.6 31.3 14.3 7.6 1.0 0.6 -8.3 -0.3 0.9 3.08 305.2 88.9 5.8 4.1 13.8 5.1 2.6 -9.5 12.4 0.7 Hunza 1.57 Properties Share price as at 12 April 2011, OSK Research | See important disclosures at the end of this report See important disclosures at the end of this publication Rating BUY NOT RATED NOT RATED BUY 1 OSK Research NO MORE “KIAM SIAP”? An evolution in Penang. “Kiam Siap” (pronounced kee-um see-yap) is a Hokkien word for stingy or tight fisted. It has often been used to describe the residents of Penang island in the state of Pulau Pinang, Malaysia. Given their largely immigrant background from China, India, Acheh and the Peninsular, Penangites (residents of Penang) were generally stereotyped as being careful with their money, to the extent of being stingy. With Penang being in the news recently with the state attracting the most investments in 2010 to a tune of RM12.2bn and with the PM Datuk Seri Najib Tun Razak making Penang the preferred hub in the region with 10 infrastructure projects such as the expansion of the airport, the port and the 2nd Penang bridge, we felt that it was timely to see if all these investments have made a change to the psyche of Penangites. For that we had a packed day trip to see: Property developers E&O, IJM Land, Hunza Properties Invest Penang / Penang Development Corporation (PDC) Figure 1: Penang attracting the most Investment in 2010 (RM) 14,000,000,000 12,000,000,000 10,000,000,000 8,000,000,000 6,000,000,000 4,000,000,000 2,000,000,000 0 Domestic Investment Foreign Investment Source: MIDA Less “kiam siap” indicators. Speaking to the management of the property developers as well as the representatives from PDC, we get the feeling that indeed there seems to have been an evolution of Penangites’ psyche in that the tightfistedness would appear to have loosened somewhat. We base this view on 3 developments: Penangites are more willing to invest in high end landed properties Penangites are more willing to shop in higher end retail outlets Penangites will gradually include more residents from abroad Penangites more willing to invest in high end landed properties. Our first stop was at IJM Land’s office where we visited the sales gallery for their flagship project in Penang, the Light. Here, for the 152 acres where the Gross Development Value (GDV) is an estimated RM6.5 – 6.8bn, IJM Land is reclaiming the land needed to build an integrated waterfront living hub comprising residential, commercial and entertainment components. The residential properties here comprise of high end condominiums as well as landed properties. Since the launch of the Light, we understand that some 95% of purchases have been Malaysians, a figure that also surprised IJM Land’s management. In fact for some of the launches, management explained that potential buyers were willing to queue up to 4 days ahead of the launch in order to secure units. With prices originally starting at RM320 per square foot (psf) for the first launch, prices have since risen to touch over RM900 psf compared to an average of RM400-500 psf for Penang island. Even when the company did not have an interest subsidy scheme, IJM Land noted that most of their buyers did not have an issue with financing their purchases. As such, with Penangites comprising a large chunk of the buyers of the Light, we can only conclude that the product, a premium products by any standard, is attractive enough for buyers in Penang who certainly appear to have shrugged off any connotation of tight fistedness in the buying of such properties. We understand that most of the launches are some 70 to 80% sold out with those remaining mainly Bumiputera units. OSK Research | See important disclosures at the end of this report See important disclosures at the end of this publication 2 OSK Research Figure 2: Location of The Light, Penang Source: IJM Land Figure 3: Masterplan of The Light, Penang Source: IJM Land Figure 5: View of the land being claimed for the Light Source: OSK Research OSK Research | See important disclosures at the end of this report See important disclosures at the end of this publication 3 OSK Research Figure 6: Scale model for the Light Source: OSK Research Penangites more willing to shop in higher end retail outlets. We next rushed over to meet the management of Hunza Properties (Hunza) at Greenlane. There we were briefed on their flagship project the Gurney Paragon which has a targeted 700,000 sq ft of retail space with departmental stores, supermarkets and F&B outlets. Located close to Gurney Mall, it will have Tanjong Golden Village as its anchor Cineplex and is still talking to premium departmental stores and supermarkets as other anchor tenants. Aside from the retail mall, the Gurney Paragon will also have residential units and an office block. The target customers of the Gurney Paragon are Penangites as well as local tourists who stay in Penang for 2 or more nights and frequent the Gurney Drive area. They aim to bring in 30% of brands not yet in Penang but which are already in existence in KL or Singapore. According to the Valiram Group which brought luxury brand Coach to First Avenue in Penang, Penang is an underserved market with much potential for luxury brands. Hunza’s management also highlighted that their positioning of the Paragon as a premium mall in Penang is due to their view that younger Penangites will be more willing to pay for premium retail products and that Penangites are not “kiam siap” but “looking for value”. Their view is that the Paragon will offer new forms of value which will definitely be a hit with Penangites as well as other local Malaysian tourists. With the Paragon being on schedule, they see Hunza gradually increasing its recurring revenue from retail operations over the next few years. Figure 7: Scale model view of the Gurney Paragon Source: OSK Research OSK Research | See important disclosures at the end of this report See important disclosures at the end of this publication 4 OSK Research Figure 8: Scale model view of the Gurney Paragon Source: OSK Research Penang residents will gradually include more foreigners. We then proceeded to E&O’s sales gallery for Seri Tanjung Pinang, Penang Island’s largest seafront development. Consisting of up to 980 acres of reclaimed land, thus far, Phase 1 of 240 acres has already been reclaimed and development is progressing well with a GDV of RM3bn. Phase 2 to follow in the future has an estimated GDV of RM12bn. Seri Tanjung Pinang is a comprehensive mixed development project consisting largely of high end landed and non-landed residential properties with commercial and retail precints as well. It also includes residential parks, a marina and the Penang Performing Arts Centre (PAC). The Seri Tanjung Pinang and its constituents appear to be the epitome of luxury with its Quayside Seafront Resort Condominiums dubbed the “most complete luxury seafront condominium in the region” featuring a resort themed water park for residents. Its terraces houses set a new price benchmark of RM1.1m on average for Penang and its Martinique sea front villa fetched a high of RM7m. Its Quayside condominiums touched a high of RM1200psf in terms of pricing. With such levels of pricing, it was not surprising to hear that Seri Tanjung Pinang’s take up has been 50% local and 50% foreign unlike the Light which was 95% local. E&O has been aggressively marketing their project overseas given its premium nature. While the fact that 50% of this project has been taken up by locals will already indicate that Penangites and Malaysians are more willing to splurge, the continued attraction of foreigners, especially those on the Malaysia My Second Home (MM2H) programme will mean that there could be further growth in the Penang expat community. As such, this could further downplay th label of Penangites being “kiam siap”. Figure 9: Location of Seri Tanjong Pinang on the north east coast of Penang island Source: E&O OSK Research | See important disclosures at the end of this report See important disclosures at the end of this publication 5 OSK Research Figure 10: Eventual completed Seri Tanjung Pinang (artist rendition including Phase 2) Source: E&O Figure 11: Fittings that come with the Quayside condominiums Source: OSK THE WAY FORWARD Plentiful wealth creation. We finished off our visit with a meeting at the PDC. There, the Chairman of InvestPenang, Dato’ Lee Kah Choon explained the wealth effect in Penang. He highlighted the increase in property prices in the town centre (from RM50-80,000 per shoplot prior to the repeal of the land act to RM150,000 after the repeal to RM500,000 after the UNESCO heritage designation) as well as the increase in flight connectivity to Penang (from 10 flights per week- Singapore to 11 flights per day), He alsopointed out that Penang accounts for 2/3rds of medical tourism in Malaysia with its 7 private hospitals. With the foreign investment and the many Multi National Corporations (MNCs) in Penang, we note that Penang people were ‘making international money’. Notable beneficiaries. Were we convinced that Penagnites were less “kiam siap”?. Given the brevity and focused nature of our visit, we are unable to confirm if the wealth effect has indeed spread to the extent of debunking the long-held stereotype. However, the projects that we visited certainly seemed to benefit or will benefit from upcoming greater spending by locals, who are themselves reaping the benefits of rising property prices and may well spend more on retail going forward. While not limited to the companies we visited, undoubtedly the beneficiaries of the greater willingness to spend by Penangites will include IJM Land, E&O and Hunza. The former 2 will continue to see good demand for their properties while the latter will see its Gurney Paragon mall receive greater number of shoppers. We also take note that our Top Buy call in the Property sector, SP Setia also has a property development on Penang which is perhaps catered more to the mass market as opposed to the Light and Seri Tanjung Pinang although it too should benefit as Penangites become more receptive to higher property prices. OSK Research | See important disclosures at the end of this report See important disclosures at the end of this publication 6 OSK Research BENEFICIARIES OF LESS “KIAM SIAP” PENANGITES Stock SP Setia Price RM Target RM Mkt Cap RMm Volume ‘000 6.45 7.23 7,569.0 2,343.0 PER (x) FY1 FY2 23.4 21.9 FY0 ROE % FY1 DY % 11.9 3.4 Rel. Performance % 1-mth 3-mth 12mth 0.7 -1.0 40.2 P/NTA (x) 3.0 IJM Land 2.78 - 3,126.6 1,675.3 17.8 15.6 6.8 0.9 2.1 0.8 0.9 1.9 E&O 1.17 - 985.8 3,578.6 31.3 14.3 7.6 1.0 0.6 -8.3 -0.3 0.9 3.08 305.2 88.9 5.8 4.1 13.8 5.1 2.6 -9.5 12.4 0.7 Hunza 1.57 Properties Share price as at 12 April 2011, OSK Research | See important disclosures at the end of this report See important disclosures at the end of this publication Rating BUY NOT RATED NOT RATED BUY 7 OSK Research OSK Research Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage All research is based on material compiled from data considered to be reliable at the time of writing. However, information and opinions expressed will be subject to change at short notice, and no part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or otherwise. We do not accept any liability directly or indirectly that may arise from investment decision-making based on this report. The company, its directors, officers, employees and/or connected persons may periodically hold an interest and/or underwriting commitments in the securities mentioned. Distribution in Singapore This research report produced by OSK Research Sdn Bhd is distributed in Singapore only to “Institutional Investors”, “Expert Investors” or “Accredited Investors” as defined in the Securities and Futures Act, CAP. 289 of Singapore. If you are not an “Institutional Investor”, “Expert Investor” or “Accredited Investor”, this research report is not intended for you and you should disregard this research report in its entirety. In respect of any matters arising from, or in connection with, this research report, you are to contact our Singapore Office, DMG & Partners Securities Pte Ltd (“DMG”). All Rights Reserved. No part of this publication may be used or re-produced without expressed permission from OSK Research. Published and printed by :OSK RESEARCH SDN. BHD. (206591-V) (A wholly-owned subsidiary of OSK Investment Bank Berhad) Chris Eng Kuala Lumpur Malaysia Research Office OSK Research Sdn. 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