Paramount (RM3.85): Sale of Jerneh Insurance to make Paramount extremely cash-rich

Volume and share prices of Paramount and Jerneh are picking up strongly today. Something's brewing inside? Disposal of Jerneh Insurance is nearing completion?

Anyway, back to Paramount. Paramount Corp Bhd is on track to dispose its 20% equity stake in Jerneh Insurance Bhd (JIB) as announced in Bursa website. Another 80% of JIB is controlled by Jerneh Asia Bhd. (What will happen to Jerneh Asia remains unknown if the sale goes through. Probably delist it and every shareholder might receive close to RM4 per share?? Just rumour only :p) Sales price is unknown. Some rumors mentioned it could be approx. RM700-800 million. The sale will see Paramount receiving at least RM140 million or RM1.19 per share.

From the fundamental perspective, Paramount is very attractive. Net cash is about RM140 million. With this sale, it's going to boost its net cash to RM280 million or RM2.40 per share. Paramount will then concentrate on property development and education. About three quarters of the revenue will come from property development while the remaining will come from education business (Owner of KDU College and KDU International School).

Earnings have been stable at around RM50-60 million p.a. over the past five years. Trailing 12M PER is at 7.0x only. Latest 1Q 2010 net profit was at RM15.7 million, mainly from its property development and education divisions. Sale of Jerneh is not going to affect its earnings as Jerneh's profit contribution is minimal. Having said that, the shares of Paramount could be very illiquid when there're no corporate actions. Thus, though the stocks is attractive, investors should be cautious about stocks' illiquid nature. There's also risk of whether the sale of Jerneh is going through or not.

Prospects as announced in 1Q 2010 quarterly results: "The property division is optimistic of achieving a better performance in 2010 given the buoyant property market and the lock-in unbilled sales brought forward. The expansion plans for the educational services division that began in the second half of 2009 will continue well into 2010/2011. As a result, the performance of the division for the year would be affected due to the budgeted costs for the ongoing upgrading and expansion plans."

Market Data:

Shares issued: 117.7 million

Market Cap: RM453 million

Trailing 12M PER: 7.0x

Book Value per share: RM4.90

Net Cash per share: RM1.20 (Might touch RM2.40 if Jerneh sale is completed)

Net profit over the past 5 years: ~ RM50-60 million p.a.

Div Yield: 7-8%

PS: Hopefully there could be some special dividend for the shareholders after the sale.

Disclaimer: The above article does not represent an investment advisory service as no subscription or management fees are charged. The contents of the article are provided as general information only and should not be taken as investment advice or as a recommendation to buy or sell any security or financial instrument. Any investment decisions carried out based on information, analysis, or commentary provided above is solely your responsibility. You should consult your investment adviser before making any investment decisions.

China property prices fall on month as curbs bite

Looks like the measures implemented by Chinese authorities are bearing fruit. Property market could develop in a more sustainable rate and avert a severe bubble burst.

BEIJING, July 12 — Chinese property prices in June recorded their first monthly fall since February 2009, providing further evidence that a government drive to let the air out of an inflated market is working.

Average prices in 70 cities edged down 0.1 per cent from May, lowering the annual property inflation rate to 11.4 per cent in June from 12.4 per cent in the year to May and April’s reading of 12.8 per cent, the National Bureau of Statistics said today.

Coming on the heels of much slower import growth and a controlled moderation in bank lending, the figures reinforced the conviction of many economists that no further policy tightening is on the cards.

However, with surprisingly resilient exports offsetting softer domestic investment, the consensus is that Beijing will not be rushed into relaxing policy either until clearer signals emerge from the all-important property and construction sectors.

“Currently the Chinese property market’s at a crossroads. It’s a game of who blinks first,” said Dong Tao, chief China economist at Credit Suisse in Hong Kong.

The government, determined to squeeze out speculators, refuses to back down by reversing curbs imposed in April; developers don’t want to waver because they paid high prices for land last year and have a bullish long-term outlook; and home buyers are sitting on the sidelines, Tao said.

“One of these three key players needs to blink first and change their stance,” he said. “I see policy in a pause mode. Whether that lasts till the end of the year is not entirely clear to me. It all depends on who blinks first.”

Engineering a soft landing in the housing market is critical.

To prick a bubble that, by common consent, had developed in big cities such as Beijing and Shanghai, the government in April raised down payments, ended mortgage discounts, tightened rules on loans to developers and made it harder to buy multiple homes.

Although annual property inflation has subsequently fallen for two months in a row, underlying demand remains strong and few home buyers expect a sharp decline in prices, said Zhang Huadong, a property analyst with Xiangcai Securities in Shanghai.

“It’s very unlikely that the government will relax its policy of curbing demand,” Zhang said. “If — and I mean if — policy were relaxed, there would be another surge in property prices. It would be a disaster for the market.”

The Securities Times reported today that banks in major cities, including Shanghai and Shenzhen, had resumed making mortgages on third homes, in what the newspaper took as a sign that the government was easing its grip.

But Tao with Credit Suisse and Liu Kun, a property analyst with Great Wall Securities in Shenzhen, said banks were just probing Beijing’s determination to implement its curbs firmly.

“The government is unlikely to announce measures to adjust its previous policies until the first half of next year,” Liu said.

Economists at Bank of America Merrill Lynch agreed.

“Banks always like to test the resolve of policymakers. We are glad to see more people are coming around to our view that there will be no policy reversal and policy easing very soon on the property front,” they said in a note to clients.

Bringing prices down is a political imperative for the ruling Communist Party.

Buying an apartment in a big city is now beyond the reach of ordinary people, reminding them of the inequalities that blight China and thus posing a potential threat to the social harmony that is President Hu Jintao’s ideological leitmotif.

Yet the government does not want to squeeze the life out of a sector that makes up 10 per cent of national output and 25 per cent of fixed asset investment and drives sales of everything from furnishing to electrical appliances and even cars. Construction also accounts for half of China’s steel consumption.

To square the circle, the government is ramping up the construction of low-income housing, though many analysts doubt it can meet its ambitious targets.

Zhang with Xiangcai Securities said he expected additional measures to boost the supply of property. “For instance, the government will force property developers to build on land they have purchased as quickly as possible,” he said.

Source: Reuters

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Key Highlights of 10MP

Some of the key highlights of 10MP announced by PM on 10th June 2010:

• Public-private partnership for projects. Fifty-two high-impact projects worth RM63 billion to be implemented.

• Of the 52 projects, seven are highway projects costing RM19 billion. They include the West Coast Expressway, Guthrie-Damansara Expressway, Sungai Juru Expressway and Paroi-Senawang-KLIA Expressway;

• Two coal electricity generation plants costing RM7 billion.

• Development of the Malaysian Rubber Board's land in Sungai Buloh, covering 3,300 acres at an estimated RM10 billion.

• Facilitation fund of RM20 billion under 10MP to help the private sector finance projects with strategic impact and those with huge economic spillover. Fund expected to attract RM200 billion in private sector investments.

• Projects considered for financing are Land Reclamation in Westport in Port Klang, Malaysia Truly Asia Centre in Kuala Lumpur and Senai High Technology Park in Iskandar Malaysia, Johor.

• Development of a wider, efficient multimodal transport network. Includes Phase 2 of East Coast Expressway from Kuantan to Kuala Terengganu, to be completed in 10MP costing RM3.7 billion.

• RM8 billion electrified double-track rail project from Gemas to Johor Bahru.

• Mudharabah Innovation Fund (MIF), with RM500 million allocation to provide risk capital to government venture capital companies.

• Gross national income per capita to rise to RM38,850, or US$12,140 in 2015. Real GDP growth of 6% per annum.

• Private sector investments to grow at 12.8% or RM115 billion per annum.

• Fiscal deficit to be reduced from 5.3% of GDP in 2010 to below 3% in 2015.

• New Energy Policy to strengthen energy supply by creating a more competitive market, reducing energy subsidy in stages.

• Regional economic development to focus on a number of dense urban clusters with high value industries to attract investments and skilled workforce.

• RM500 million fund for the repair and maintenance works of public and private low-cost housing.

• 78,000 new affordable public housing units nationwide. Low-cost public housing units would be provided to qualified individuals and families with household incomes of less than RM2,500 per month.

• Bumiputera participation in economy to include financial and non-financial assets, such as real estate and business premises as well as professional employment.

• Target of at least 30% bumiputera corporate equity ownership at macro level remains.

• Pelaburan Hartanah Bhd to set up Real Estate Investment Trusts (REITs) to facilitate bumiputera investment in commercial and industrial properties and benefit from property appreciation.

• The 10MP will focus on raising the income and quality of life of the bottom 40% household income group. Bumiputeras form 73% of the 2.4 million households in this group.

• RM280 million for 2011 and 2012 for government-aided schools to undertake renovations, upgrading. Chinese schools, Tamil schools, religious schools and mission schools will receive RM70 million for the first two years of the plan.

• Expanding essential facilities in rural areas. 6,300km of paved roads in Peninsular Malaysia, 2,500km in Sabah and 2,800km in Sarawak, which are expected to benefit 3.3 million people. Government to boost public transportation network in Kuala Lumpur with high capacity Mass Rapid Transit system to cover a radius of 20km from the city centre, with total length of about 150km. When fully operational, it will serve up to two million passenger trips per day from 480,000 trips on current urban rail systems.

• RM1.5 billion Green Technology Financing Scheme to enhance the application of green technology in the production of goods and provision of services.

Source: The Edge

China Property Market: Hard crash unlikely

China property market came to the limelight again when the Chinese government announced stricter regulations for the property market in mid April which were similar to the regulations back in pre-crisis levels in Sept 07. The announcement was made after Housing Price Index (HPI - Based on 70 major cities in China) continued to rise by 11.7% y-o-y in Mar 2010. On month-to-month basis, HPI retreated for the first two months of this year before rising again in Mar 2010. The government's tightening measures early this year appeared unable to contain the rising property prices.

Tightening measures announced in Jan 2010:

1. Deposit: Raised to 20%-30% for first time buyers and 40% for second buyers as opposed to 20% across the board.

2. Mortgage rate (% of BLR currently at 5.94%): 70%-85% for first time buyers and 85%-110% for second buyers as opposed to 70% across the board

3. Increase supply of properties to suppress prices

4. Prevent land and property hoarding; Outstanding land premium to be collected

Tightening measures announced in Apr 2010:

1. Rise in downpayment for second home from 40% to 50%

2. Rise in minimum mortgage rate for second home from 85% to 110% of BLR (5.94%).

3. Greater efforts to deal with violations such as keeping unused land, hoarding properties and price rigging.

4. Discourage lending to third home buyers and non-residents

5. Developers to launch all units which have obtained presale consent within a certain timeframe

What is actually the property market condition in China?

There are many ways to look at it. Some of the main methods used to evaluate include:

1. Housing Price / Income Ratio (Using Median House Price /Median Annual Income)

2. Mortgage Payment / Monthly Income

3. Rental Yields

Housing Price / Income Ratio (The lower the more affordable):

On a national level, China doesn't appear to be excessive and is close to the average. (I think KL is somewhere along that line as well) The highest are Singapore and Hong Kong (Too expensive).

However, on a closer look at the individual cities, Beijing topped the list while Shanghai was close to Singapore and Hong Kong. Based on this, actually the highish property prices are only concentrated on several cities like Beijing, Shanghai, Tianjin, Shenzhen and Guangzhou. Nonetheless, China is not just based on two or three cities unlike other countries like France or UK, but has about 160 cities which have more than 1 million population. Therefore, looking at China as a whole, China appear to be nowhere near bubble territory.

Mortgage payment / Monthly Income (Affordability Index):

Surprisingly, affordability index has been on a downward trend with only a slight uptick expected in 2010. A lower affordability index indicates higher affordability. This was due to the higher growth in household income as compared to property prices.

Rental Yields:

Nonetheless, rental yields are not painting a good picture on property prices. China's rental yield is only at 3.24% with Shanghai and Beijing dropping below 3%. The reason could be due to the loose monetary policies and regulations which encourage people to buy instead of renting. Such low rental yield might not be able to sustain the property prices.

Potential further measures by the Government:

1. Capital gain taxes

2. Property taxes

3. Prohibition of purchase from non-residents

4. Rate hikes in RRR and interest rates

5. Increasing supply of houses

Property market outlook:

1. Property sales will slowdown: Buyers might take a 'wait and see' approach to see how the government is tackling the issue and wait for property prices to drop.

2. Property prices might drop by 10-20%, but unlikely to fall below 30%. Most developers are sitting on strong cash position and limited supply, therefore not in a hurry to sell off their properties at lower prices. In addition, it is not the government's intention to lower the property prices but to quell speculation on property market.

3. Property market might turn to a buyer's market where supply exceeds demand in 2H2010. This is due to potential incoming supply of properties in 2H2010 as many projects were started in 2H2009. Usually, it takes 9-12 months lead time for projects to reach pre-sale condition.

Tightening measures good for long term sustainability of the property market:

Many investors are worried of tightening measures by government which could hurt corporate earnings and slow down the economy. However, it is actually good that the government is making efforts to cool down the property market to prevent any asset bubble from forming especially in the top 5 cities, namely Beijing, Shanghai, Tianjin, Guangzhou and Shenzhen. Inflation for now is not really an issue as it is expected to be around 2-3% only with most of the inflation coming from food prices. On the other hand, there are worries that non-performing loans will surge on the back of possible property collapse which will cause a banking collapse. Non-performing loans might rise but will be cushioned by low leverage and high savings rate among China households and corporations. A banking collapse is also unlikely as domestic funding is largely controlled by the government and the government will not let bank runs to happen in China like what had happened in US and EU. This is in addition to Beijing's strong fiscal position to support the banking industry.

Therefore, property prices could drop, but will not be severe. Government will continue to introduce further measures to cool down the property market which will cause volatility to the equity markets. Nonetheless, the measures undertaken by the government will be good for the sustainability of the property market and prevent any asset bubble burst.

Naim’s (RM2.95) 3Q profit up 44% to RM21m

Naim Holdings Bhd posted a 44% rise in net profit to RM21.4 million in its third quarter (3Q) ended Sept 30, 2009 from RM14.88 million a year earlier on the back of a 10.8% rise in revenue to RM144.46 million from RM130.33 million. Basic earnings per share (EPS) rose to 9.02 sen from 6.11 sen. It had on Sept 15, 2009 paid a first interim single-tier dividend of three sen per share. For the nine months to Sept 30, 2009, net profit rose 11.6% to RM59.89 million from RM53.66 million a year earlier, while revenue fell 1.7% to RM374.11 million from RM380.59 million. EPS rose to 25.26 sen from 22.04 sen.

Source: The Edge

Commentary:

A good counter to get exposure into the Sarawak construction sector. Current outstanding construction orderbook is approximately RM820mil which could last them for more than 2 years (Construction revenue is about RM300mil p.a. while property development revenue is approximately RM200mil). A strong contender for Sarawak projects.

Construction Orderbook: Naim is currently holding RM1.3bil (Could be revised up to RM2bil) LOI (Letter of Intent) for Kuching flood mitigation project of which Naim holds 50%, to be implemented over 10MP. This will translate into RM130mil p.a. revenue for Naim over the next 5 years. To recap, Naim has been awarded Phase 1 of this project worth RM149mil and works are still ongoing. This will further increase the likelihood of the following phases being awarded to Naim. Naim is also aiming for supply and installation of college equipment project worth RM100mil which is still at LOI stage, possibly converting into award in 3Q2010. Naim managed to secure about RM257mil worth of jobs YTD and possibly could replenish around RM400mil p.a. in 2010-2011 given the government's effort to speed up infrastructure projects in Sarawak ahead of Sarawak's state election somewhere in 2011. In addition, Naim is also offered a project to rehabilitate Fiji's national highway worth US$100mil (RM345mil). Nonetheless, it has not yet accepted the offer pending several issues to be ironed out.

Valuation: Valuation remains attractive. Net profit expected to exceed RM80mil in 2009 and could reach even RM95-100mil in 2010 backed by improving property sales in tandem with economic recovery, strong construction margins and potential awards from Fiji and SCORE (Sarawak Corridor of Renewable Energy). Earnings are further supported by its stake in Dayang which contributes more than RM20mil of earnings annually. EPS for 2009 and 2010 should be at least 32 sen and 38 sen respectively (Excluding earnings contribution from Borcos), translating into PER 2009 and PER 2010 of 9.2x and 7.7x respectively. On top of that, Naim's 36% associate company, Dayang also recently acquired 40% stake in Borcos which could contribute earnings of about RM9mil or 3.6 sen per share annually.

Assuming EPS 2010 of 41.6 sen (38 sen + 3.6 sen), share price should be above RM4.00 just by attaching PER of 10x. Share price should surge on more awards of projects, brighter property market outlook and stronger quarterly results performance.

Shares issued: 250mil

Market Cap: RM737.5mil

Net Gearing: 16%

Div Yield: 2.5%

Share Price: RM2.95

Revenue 2009 & 2010: RM530mil, RM650mil

Net Profit 2009 & 2010: RM80mil, ~RM100mil

PER 2009 & 2010: 9.2x & 7.1x

Disclaimer: The above article does not represent an investment advisory service as no subscription or management fees are charged. The contents of the article are provided as general information only and should not be taken as investment advice or as a recommendation to buy or sell any security or financial instrument. Any investment decisions carried out based on information, analysis, or commentary provided above is solely your responsibility. You should consult your investment adviser before making any investment decisions.

Sunrise (RM2.12) plans projects worth RM1.5b in KL

SUNRISE Bhd plans to launch two new property projects worth some RM1.5 billion in Kuala Lumpur over the next four months. Executive chairman Tong Kooi Ong said Sunrise will launch 28 Mont' Kiara, a 41-storey tower featuring 460 units of condominiums, each ranging from 3,000 sq ft to 4,000 sq ft, this December.

Early next year, it will launch Solaris KL, two 30-storey towers with 550,000 sq ft of office space on Jalan Sultan Ismail. Sunrise has done the foundation for 28 Mont' Kiara and hopes to start construction in December, completing it in three years. He said work on Solaris KL will start early 2010 and the project will be ready in four years.

"We believe the market will do well next year. We are confident of sales because of the location and features of the properties," he said after a shareholders' meeting in Kuala Lumpur yesterday. Sunrise has applied to obtain the Green Mark certification for Solaris KL, which is issued by the Singapore government and awarded to buildings that are environmentally friendly.

Its 11 Mont' Kiara is the first local residential project to receive the Green Mark. Solaris on the Park, a mixed development in Mont' Kiara, which is yet to be launched, has also won the Green Mark. Tong is optimistic Sunrise will do well with unbilled sales of RM860 million, which will underpin its earnings for the next two years to 2011. Most of the unbilled sales or sales that have yet to be booked into its accounts were from higher margin products in Mont' Kiara.

Last year, Sunrise made a net profit of RM156.2 million on revenue of RM803.9 million. Among the projects Sunrise will launch in 2010 are Solaris on the Park, and a RM1 billion residential project in Richmond, Canada. Sunrise will launch a mixed development project on 0.6ha of prime land opposite the Petronas Twin Towers where Wisma Angkasa Raya now sits in 2011.

"We have done a market study in terms of the various composition of properties, whether it would be a hotel, a condominium or an office block, with retail space. We have decided what we want. We are at the stage of appointing architects now," Tong said. The 24-storey Wisma Angkasa Raya, which is around 30 years old, is Kuala Lumpur's first high-rise office building. Sunrise paid RM179 million for land and property last year.

Source: www.btimes.com.my

SP Setia (RM3.81) to develop RM2bil mixed development in China

SP SETIA Bhd, the country's biggest property developer, will develop a RM2 billion mixed development project in XiaoShan, Hangzhou City in China, scheduled to begin in the first quarter of 2010. This will be SP Setia's maiden project in China, in a joint venture (JV) with Chinese landowner, Hangzhou Ju Shen Construction Engineering Ltd (HJSCEL).

SP Setia, through its subsidiary Setia (Hangzhou) Development Co Ltd, holds a 55 per cent stake in the JV, while HJSCEL has a 45 per cent stake. Work on the 10ha project will be completed in four phases over five years. It features 11 residential towers, five office blocks, serviced apartments, a four-star hotel, a 300,000 sq ft retail mall and signature shops, said SP Setia president and chief executive officer Tan Sri Liew Kee Sin.

"We are awaiting for approvals from the Chinese authorities. We hope to get them by early 2010 and start Phase 1 of the project immediately," he said after the signing of the JV agreement with HJSCEL in Shah Alam, Selangor, yesterday. The event was witnessed by Housing and Local Government Minister Datuk Kong Cho Ha. "Phase 1 includes commercial properties and service apartments worth RM500 million," Liew said. "We are not looking at borrowings as it is a self-funded project. We are developing the properties on a sell-and-build concept," he added.

However, it will retain the mall to control its tenant mix.The service apartments will be pegged at RM400-RM500 per sq ft, while the commercial properties will go for RM500 per sq ft onwards. "Our first income from this project will come in two years. The project will contribute positively to the future earnings and cash flow of SP Setia. It will also tell the world that we are ready to be an international property player," Liew said.

Liew said SP Setia is in talks with other landowners in China to form JVs, with priority to develop in Hangzhou. He added that the company has a five-year plan to get 30 per cent of its net profit and revenue from overseas projects by 2014, from 2-3 per cent currently. "We will focus on Vietnam and China for the next few years."

Source: www.btimes.com.my

WCT (RM2.68), Iskandar to develop RM600m condos

WCT Bhd and Iskandar Investment Bhd will jointly develop and co-own the 4.4-hectare 1Medini residential project inMedini Iskandar, Johor with a gross development value (GDV) of RM600 million. The project will be developed by One Medini Sdn Bhd, a 70:30 per cent joint venture between WCT's subsidiary, WCT Land Sdn Bhd and Medini Land Sdn Bhd, a subsidiary of Iskandar Investment.

WCT chairman Datuk Captain Ahmad Sufian attributed the involvement of the company in the 1Medini project as a bonus because WCT had already awarded RM766 million worth of infrastructure works in Medini Iskandar in July this year, where works are expected to be completed by July 2011.

"We are proud indeed to be given this golden opportunity to make our first foray into the Iskandar Malaysia via the Medini Iskandar project and hope to expand our investment here," he told reporters after the signing of shareholder agreement for the development of 1Medini residence between WCT Land and MediniLand, in Putrajaya today. Ahmad said the WCT also wanted to further grow its business in Malaysia and would continue to bid for any projects locally as well as international.

Its order book currently stands at RM3.5 billion. In 2008, local operations contributed 40 per cent to the group's revenue while the balance of 60 per cent came from the overseas market. The construction and property development company currently has presence in United Arab Emirates, Qatar, Bahrain, Oman, India and Vietnam. Scheduled to be fully completed by 2015, the 1,332 units of condominiums in1Medini would include a 68,800 square feet commercial area for local retail businesses.

Priced at RM350 per square feet, the first phase of the condominium is expected to be launched in early 2012. Iskandar Investment president and chief executive officer, Arlida Ariff, meanwhile, said the strategic partnership with WCT in 1Medini project would help to meet the increasing demand for quality homes as well as to attract talented global citizens to live, work and play in Iskandar Malaysia.

There has been interest from both Indonesians and Singaporeans, she said. According to the Iskandar Regional Development Authority (IRDA), Iskandar Malaysia has over RM47 billion in committed funds from the government bodies and international investors to date.

Source: www.btimes.com.my

Commentary: WCT's 70% stake in the RM600mil project would amount to RM420mil, not a significant amount to its overall property development compared to its Paradigm project in Kelana Jaya (RM1.4bil, currently under construction), Platinum in Vietnam (RM2bil - construction schedule unknown, not so soon) and existing residential projects (outstanding GDV of RM2.1bil). The project will be launched in mid-2010 while construction will start in mid-2010 and expected to complete by 2015.

By simple calculation, assuming 8-year horizon over its sales, 20% net margins, probably can add RM10mil net profit to its earnings per year starting mid-2010. Situated close to Legoland in Medini North, Newcastle University Medical Malaysia, Kota Iskandar and Iskandar Financial District, the properties most likely will enjoy good take up rates. There are many who take a cautious stance over the likelihood of success of Iskandar Corridor (including me) in view of Malaysia's poor records of launching corridors successfully (Proton City, Putrajaya/Cyberjaya, MSC etc).

Nonetheless, so far property developers like SP Setia, Berinda (A unit of Kuok Group) indicated that they're enjoying good take up rates from Iskandar projects with buyers coming from China, Singapore & Malaysia (Ok, give the benefit of doubt on Iskandar's success). This is WCT's first foray into Iskandar's property development and most probably won't be the last. Earlier, WCT was awarded RM766mil worth of infrastructure works.

WCT's current orderbook is at RM2.8bil (Excluding Paradigm Project works of RM733mil as it's inter-segment sales) which will last the company 2 years. WCT is currently eyeing for a few jobs in Middle East (Total project bids of about RM3.2bil), Vietnam and Malaysia (LCCT - RM2bil, Sabah water infrastructure works - >RM1bil, hospital jobs - RM200mil). Thus far, WCT orderbook replenishment has been impressive at RM1.4bil YTD, exceeding its forecast of RM1bil which further indicates WCT's strong ability to secure projects.

At a discount to its peers: Assuming orderbook replenishment of RM1.9bil and RM2bil for FY2009 and FY2010, its revenue and net profit for FY2010 should be in the range of RM2.4bil and RM170mil respectively. EPS for 2010 would be at 22.1 sen. PER 2010 is at 12x, which is a huge discount compared to Gamuda & IJM (about 20x). By attaching PER of 15x, share price should move to RM3.30. Price triggers including news of job wins and recognition of its additional works worth RM740mil for NDIA (New Doha International Airport) which will restore its margins (Earlier NDIA was a low margin job owing to unrecognized additional works).

Disclaimer: The above article does not represent an investment advisory service as no subscription or management fees are charged. The contents of the article are provided as general information only and should not be taken as investment advice or as a recommendation to buy or sell any security or financial instrument. Any investment decisions carried out based on information, analysis, or commentary provided above is solely your responsibility. You should consult your investment adviser before making any investment decisions.

Suncity to take part in RM2.5 billion China project

Sunway City Bhd (SunCity) has signed a joint-venture agreement with Sino-Singapore Tianjin Eco-City Investment and Development Co Ltd (SSTEC) to undertake a RM2.5 billion mixed development in Tianjin, China. However, implementation of the project is subject to a feasibility study.

The massive 3,000ha Tianjin Eco-City, which is worth several billion ringgit, will be developed in three phases from 2011. SunCity will develop part of the second phase, covering 41ha, with SSTEC. Sunway Group founder and chairman Tan Sri Dr Jeffrey Cheah said that a joint-venture company, led by SunCity, will be set up after the study is completed.

The joint-venture company will build bungalows, villas, semi-detached and terraced houses, high-rise residences and commercial properties, including a shopping mall, on less than 20ha. The rest will be kept green. "We are very confident of this project as it is driven by the Chinese and Singaporean government. SSTEC has attracted the largest and best eco-developers in Asia.

This proves the project will happen," said Cheah. He was speaking at a press conference yesterday in Bandar Sunway, Selangor, after inking an agreement with SSTEC to carry out the study and market research, and to come up with a sustainable business model for the project within six months.

The developers include China's Shimao Group, Japan's Mitsui Fudosan and Taiwan's Farglory Group, which are involved in the first phase of Tianjin Eco-City. "The main thing is to get the right product so the development can run. The next six months is very crucial. We will plan the 41ha properly to come up with a sustainable, workable and viable development," Cheah said. He added that the project will be funded by equity and bridging finance. Part of the funding will also come from a real estate investment trust (REIT) that SunCity is planning to launch in the next one to two years.

SSTEC is the master developer of Tianjin Eco-City. It is a 50:50 joint venture between the Chinese consortium led by Tianjin TEDA Investment Holding Co Ltd and the Singapore consortium led by the Keppel group. Tianjin Eco-City is a landmark bilateral project between China and Singapore with private-sector investment and development. When completed, it will have 26,500 households.

SSTEC chief executive officer Goh Chye Boon said it was targeting reputable developers from the project to work with when it embarks on new projects in China. "We want to make sure Tianjin Eco-City is sustainable so we can replicate the development in other parts of China. We are looking for bigger land now," Goh said, adding that SunCity may be given more jobs in Tianjin Eco-City. He said SunCity may also be roped in to work on other projects that the Chinese and Singaporean consortiums are eyeing in China, Indonesia, Vietnam and India.

Source: www.btimes.com.my

Budget 2010 & others: My simple take

Highlights:

Construction:

Government spending about RM9bil on infrastructure projects, of which RM4.7bil on road and bridge projects, RM2.6bil on water supply and sewerage services, RM899mil for rail facilities, RM820mil for ports and sea services coupled with RM276mil for airport projects (Upgrading of Penang or Sibu airports?). In addition, another RM2.3bil will be allocated for construction and upgrading of infrastructure in rural areas, of which RM857mil will be used to construct 510km of rural roads and 316km of village roads such as Kapit, Lawas and Kimunjan in Sarawak and Kinabatangan, Kota Belud and Keningau in Sabah.

Beneficiaries:

Road and bridge projects - WCT, Gamuda, Mudajaya, IJM, Muhibbah Engineering etc.

Water supply & sewerage - Hock Seng Lee, Loh & Loh, Salcon, WCT

Ports & sea services - Gamuda, Muhibbah Engineering, Putrajaya Perdana

Airport projects - WCT, Fajarbaru, Gamuda

Sarawak & Sabah: Hock Seng Lee, Naim Holdings, Cahya Mata Sarawak, UBG, WCT

Property:

A tax of 5% on gains from disposal of property while the existing tax exemption is maintained only for gifts between parents and child, husband and wife, grandparent & grandchild. This exemption will also be given on disposal of residential property once in a lifetime. This will take effect from 1 Jan 2010. Nonetheless, the Government is launching a scheme to allow EPF contributors to utilize current & future savings in Accounts 2 for purchase of one property at a time. However, the calculation of future savings remains vague.

A counterproductive move to the property sector which is a discouragement to property investors from local and abroad. Whether the 5% tax is applied to gains from all kinds of disposal remains vague. What happen if I bought a house like 20 years ago which cost me RM50K and now am selling it at RM200K? Then I have to pay as much as RM7.5K in taxes which is a lot. There are even some reports that said that this 5% tax on gains only applies to disposal of properties within 5 years and beyond while gains from disposal within 2, 3 & 4 years might actually be taxed as high as 30%, 20% & 15% respectively (Not sure about this though). Could be a dampener to property stocks prices next week. Nevertheless, the new EPF scheme to allow usage of Account 2 to purchase residential properties will provide some respite, hopefully.

Telcos:

Tax relief on broadband subscription fee up to RM500 a year from 2010 to 2012 is proposed. Government will also expedite implementation of High Speed Broadband at a total costs of RM11.3bil, of which RM2.4bil is from the Government while the rest of RM8.9bil will be from Telekom Malaysia. Broadband services with 10Mbps will be available in KL & Selangor by end-March 2010.

Tax relief is positive for telcos like Digi, Axiata, Maxis (to be listed soon) and Green Packet (Packet One is the subsidiary which offers Wimax). TM might attract interest on HSBB.

Finance industry:

Liberalize common sharing arrangements between stockbrokers and remisiers in 2 stages to encourage retail participation. The 1st stage is to allow sharing at min rate of 40% for remisiers and fully liberalized by Jan 2011. Allow 100% foreign equity participation in corporate finance and financial planning companies as compared to current requirement of 30% local stake.

The liberalization will allow greater competition among stockbrokers in rewarding remisiers who perform well and at the same time encourage remisiers to garner more interest in the stock market from the investors. The allowance of 100% foreign equity participation in corporate finance is a welcome relief which will encourage greater competitiveness among the local corporate finance providers and more corporate exercises will be seen in the market, good for the capital market.

The statement of 'From Low Income to High Income Economy'

A slogan that has been preached for 10 years but doesn't seem to go anywhere.

Here are some Government proposals and aims:

1. Double income per capita within 10 years:

Very ambitious. This means 7.2% growth p.a. Adding 2% p.a. population growth, 9.2% growth p.a. in income per capita for the next 10 years!! We are aiming to beat China izzit?? How are we going to do that?? No answers.

2. Increasing private investment by enhancing domestic investment and encourage local companies abroad to remit their profits and reinvest into the country:

How to encourage? Dunno. Companies are not charity organizations. There is no obligation or responsibility at all for local companies abroad to remit their profits & reinvest into Malaysia. If they could find greener pastures overseas, why come back here? Government must take action first. Don't expect companies or talents to automatically come back to contribute to Malaysia. Just by talking to companies' management here, they find it so difficult to employ good people to work with. Lazy, incompetent and the worst thing is that they can't even speak a proper sentence in English. Our very little attraction of bringing in foreign investment which is our proficiency in English has even been destroyed by our very own system here. "Demolish PPSMI", we often hear. Recent Government's flip flop decision to revert back to BM in teaching Maths and Science is not helping either.

3. Providing business friendly environment:

First thing that comes to my mind, broadband. Our broadband penetration is just 25%, broadband service ranking is No.48 out of 66 countries. Broadband fees are exorbitant, a lease line 6Mbps from TM costs RM250K per year, which is way beyond many SMEs' budget. If we don't have the IT infrastructure to enable businesses to run, how to attract investors? Well, at least HSBB by TM is rolling out in 1Q2010, a good move in the right direction. Hopefully the timeline will be done as announced. Coupled with other reasons like escalating crime rates, corruption, weakening workforce, we are actually seeing a decreasing trend in net FDI as shown below.

4. Strengthening higher education by allowing IPTA greater autonomy and relaxing rules on income generation:

Nothing to say. A look at our universities' ranking will show how pathetic our education system and human capital are. As long as universities are not fully liberalized, not free to think, not free to discuss politics or join political parties, have to kowtow to the Government in appointment of management & funds or anything, not based on merits, not given fair chance of education among all races, then kiss goodbye to whatever intentions to strengthen higher education. Poor universities => incompetent graduates => absorbed into civil service => ballooning civil service => high operating expenditure => lower GDP growth => stagnant salaries => strain on working population. We have a massive 1.2 mil civil servants against 10 mil working population. More money is poured out to sustain Government operation rather than being spent on development. Growth in operating expenditure is increasing at a greater magnitude than development expenditure for the past few years.

Nonetheless, the budget is starting a new direction for the management of its expenditure. The Government intends to cut operating expenditure from RM154.2bil to RM138.3bil to reduce inefficiencies in Government operations while development expenditure remains almost the same. Ok. Fair enough. Hopefully, the Government could continue the trend in cutting operating expenditure and increasing development expenditure at the same time.

A lot of measures laid out in the Budget do not have a clear direction on how it can transform Malaysia into a high-income economy. Human capital development is of utmost importance. I'm sure many had discussed at length on our problems of human resources. Before we develop all the 1st class infrastructure, we have to develop human capital first. But we are doing it the other way round. Thus all these projects on Putrajaya & Cyberjaya, Proton City, MSC, Iskandar Corridor etc have a greater chance of failing. We simply don't have the capability or mental capacity to handle all these projects. (By the way, what's happening to Iskandar? CEOs keep on resigning from their posts one. Too much politics involved kah? Too corrupted? Too much bureaucracy?)

The Government also intends to implement measures to attract talents to Malaysia. I guess the main motivator will be the salaries here. Since Malaysian salaries are so low, it will be an uphill task to attract Malaysian and foreign talents to come to Malaysia. The continuous influx of foreign labor (3.5 million out of 27.5 million population = 12.7%!!!) will continue to impede the economy from moving higher in the value chain and putting a cap on Malaysian salaries. Malaysian companies won't be willing to move up when cheap foreign labor is so readily available.

Anyway, Malaysia has always been famous for talk and less action. Word without action is dead. Hopefully, Najib could prove otherwise. Give him the benefit of doubt as he pleaded.

For the Budget 2010 speech, click here. (Very long la. 49 pages. Eyes swollen already)

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