Sunway REIT: The Goliath of MREITs - 23/09/2010

PP 7767/09/2010(025354)
RHB Research
Corporate Highlights
Malaysia
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M
I n itiat e Co verag e
23 September 2010
MARKET DATELINE
Sunway REIT Share Price

Fair Value
:
:
RM0.965
RM1.05
The Goliath of MREITs Recom : Outperform
(New Coverage)
Table 1 : Investment Statistics (SUNREIT; Code: 5176) Bloomberg: SREIT MK

Net Net
FYE Turnover profit EPU Growth PER DPU C.EPU* P/NAV ROE Gearing GDY
June (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%) (%)
2010F# 302.2 164.2 6.1 - 15.7 6.1 - 1.0 10.1 29.3 6.3
2011F 330.9 180.9 6.7 10.1 14.3 6.7 6.5 1.0 6.9 29.3 7.0
2012F 340.6 196.3 7.3 8.6 13.2 7.3 6.9 1.0 7.5 29.3 7.6
2013F 353.3 208.1 7.8 6.0 12.4 7.8 7.2 1.0 8.0 28.2 8.0
Main Market Listing /Trustee Stock/Syariah Approved Stock By The SC * Consensus Based On IBES Estimates
# Audited financial results were not available
♦ The largest MREIT. Sunway REIT made its debut on 7th July 2010. It is
the largest REIT in Malaysia by market cap, asset size, and total Issued Capital (m shares) 2,680.1
Market Cap (RMm) 2,586.3
outstanding units. It has 8 strategic commercial assets in its portfolio,
Daily Trading Vol (m shs) 2.1
which include three retail properties - Sunway Pyramid Shopping Mall in
52wk Price Range (RM) 0.875-0.97
Bandar Sunway, Sunway Carnival Shopping Mall in Penang and SunCity Major Shareholders: (%)
Ipoh Hypermarket in Ipoh; three hotel properties – Sunway Resort Hotel & Sunway City Berhad 36.6
Spa and Pyramid Tower Hotel in Bandar Sunway, and Sunway Hotel GIC 5.0
Seberang Jaya in Penang; and two office towers – Menara Sunway in EPF 8.4
Bandar Sunway and Sunway Tower in KL. Total asset size is estimated at
FYE Jun FY11 FY12 FY13
RM3.7bn.
EPU chg (%) - - -
♦ Investment case: (a) High investibility due to its large market value and Var to Cons (%) 3.8 6.2 7.8
free float; (b) A portfolio of quality retail and commercial assets that
Share Price Chart
provide sustainable and steady earnings growth; (c) Growing young
demographics to support private consumption and retail spending growth;
and (d) A pool of assets available from Sponsor for future expansion in
assets size.
♦ Risks and concerns. The risks include: 1) Sharp increase in interest rate
that will significantly affect borrowing costs; 2) Subdued office market in
Klang Valley; 3) Outbreak of influenza which would affect tourist arrival;
and 4) country risks.
Relative Performance To FBM KLCI
♦ Earnings outlook. Our EPU forecasts are decent, estimated at 10%
growth for FY11, on the back of slightly higher rental rate for Sunway
Pyramid Shopping Mall, as well as higher occupancy rate for Sunway Resort
Hotel & Spa and Pyramid Tower Hotel, supported by better macroeconomic FBM KLCI
environment and hence private consumption. Note that, we have not
factored in any potential acquisition of properties in our earnings
Sunway REIT
projections and balance sheet forecasts.
♦ Valuation. We assume 100% payout for Sunway REIT over the next three
years. As such, our DPU forecasts translate to a gross yield of 7% and
7.6% for FY11 and FY12. In line with our valuations for other REITs under
our coverage (Axis REIT and Quill Capita), and based on our target MREIT
yield of 7% against our FY12 DPU forecast of 7.3 sen, our indicative fair Loong Kok Wen, CFA
value for Sunway REIT is RM1.05. We initiate coverage on Sunway REIT (603) 92802237
with an Outerform rating. loong.kok.wen@rhb.com.my
Please read important disclosures at the end of this report. Page 1 of 18
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INVESTMENT CASE
♦ High investibility due to large market cap, asset size and total outstanding units. Sunway REIT is the
largest REIT in Malaysia thus far. It has eight assets in total - which include three retail properties - Sunway
Pyramid Shopping Mall in Bandar Sunway, Sunway Carnival Shopping Mall in Penang and SunCity Ipoh
Hypermarket in Ipoh; three hotel properties – Sunway Resort Hotel & Spa and Pyramid Tower Hotel in Bandar
Sunway, and Sunway Hotel Seberang Jaya in Penang; and two office towers – Menara Sunway in Bandar Sunway
and Sunway Tower in KL. Total assets value as at 4QFY10 stood at RM3.73bn, the largest asset size amongst the
REIT in Malaysia. Based on a unit price of RM0.965 (yesterday’s close) and total number of units of 2.68bn, its
market cap and free float (estimated) are also the largest at about RM2.6bn and 62%, respectively. Given these
features, Sunway REIT is undoubtedly more appealing to institutional investors, due to its investibility and
liquidity. Hence, these largely explain Sunway REIT’s current premium valuation compared to other MREITs.
Currently, apart from Suncity’s 36.6% holdings in Sunway REIT, other institutional unitholders include
Government of Singapore Investment Corp (5%) and Employees Providend Fund (8.4%). Foreign shareholding
stood at at about 20-25% (including GIC’s stake).
Chart 2: Market cap of MREITs

R M m il
3,000
2,586
2,500
2,000
1,512
1,500
1,020
1,000 816
752
667
511 522
500 354 394 406
337
123
0
A trium To wer UOA QC Hektar A mFirst A manah Raya A l-A qar A l-Hadharah A xis Starhill CapitaM alls Sunway
B o ustead
Source: Company
Chart 3: Total assets of MREITs

RM mil
4 ,0 0 0
3 ,3 6 0
3 ,5 0 0
3 ,0 0 0
2 ,5 0 0 2 ,1 8 5
2 ,0 0 0 1 ,6 5 7
1 ,5 0 0
1 ,0 1 1 1 ,0 4 4
866 908
1 ,0 0 0 748 777 818
519 599
500 182
0
A trium UO A T ower A manah H ektar QC A l- A xis A l-A qar A mFirs t Starhill C apitaM alls Sunway
Raya H adharah
Bous tead
Source: Company
Page 2 of 18
Chart 4: Free float of MREITs
R M m il
1,800
1,600 1,535
1,400
1,200
1,000
800 688
600 487
379
400 286
255 272
137 146 159
200 113 114
74
0
A trium A l-Hadharah Hektar UOA A l-A qar QC A manah Raya To wer A mFirst Starhill A xis CapitaM alls Sunway
B o ustead
Source: Company (dated 20th July 2010)
♦ Portfolio of quality commercial assets. Out of the total eight assets of Sunway REIT, four assets
(representing 85.5% of total property value) are concentrated at Bandar Sunway, which is a key master-planned
township that the Sponsor – Suncity has successfully developed over the years. Other retail and hotel assets are
spread over the northern region of Peninsular Malaysia, namely Penang and Ipoh. Another office tower is
strategically located within the Kuala Lumpur city centre. Below is the details of the eight assets:
Property 1 – Sunway Pyramid Shopping Mall
Brief description Strategically located in Bandar Sunway, Selangor, it is the second largest shopping mall in Malaysia after
Mid-Valley (1.7m sq ft of NLA). It is considered a “regional”/”lifestyle” mall (as against a plain vanilla
“neighbourhood” mall) with a 12-screen Cineplex, an ice-skating rink, a 48-lane bowling alley and a
143,000 sq ft convention centre.
Rental basis As at Dec 2009, about 75% of tenancies were based on the greater of a fixed-base rent or turnover rent,
with the remaining tenancies on a fixed-base rent basis.
NLA (sq ft) 1,685,568* No of tenancies 711
Parking bays (no) > 3,800 Top three tenants# (1) Jusco (2.6%)
Market value (RM m) 2,300 (2) Tanjong Golden Village (1.8%)
Age of building (years) 13 (3) Parkson Department Store (1.7%)
* 1,542,101,sq ft retail and 148,467 sq ft. convention centre # % of gross rental income for the month of Feb 2010
Source: Company
Page 3 of 18
Chart 5: Historical rental and occupancy rates Chart 6: Tenant mix by trade sector (Gross rental income)
RM
9 .5 0 100% F as hion & footwear
98% 99%
93% 92% 29.1% F &B
9 .0 0 80%
35.2%
8.99 D epartment s tore
8.79
8 .5 0 60%
L eis ure &
8.41 entertainment
8 .0 0 40% E lec tronic s
2.8%
7.93 4.1%
E duc ation & s ervic es
7 .5 0 20% 4.7%
5.0% 19.1% O thers
7 .0 0 0%
FY 0 7 FY 0 8 FY 0 9 8 M Feb1 0
N et rent ps f/month A vg oc c upanc y rate

Gross rental income for the month of Feb 2010
Source: Company
Source: Company
Chart 7: Projected lease expiry schedule

RM psf
70% 12
60.2% 10.73
60% 10
8.61
50% 8.86
8
40% 7.10
6
30% 24.8%
4
20%
12.3%
10% 2
2.0%
0% 0
FY2010 FY2011 FY2012 Thereafter
As % of NLA
Average monthly rental of expiring tenancies
Source: Company
Page 4 of 18
Property 2 – Sunway Carnival Shopping Mall
Brief description Strategically located within Pusat Bandar Seberang Jaya, an integrated township initiated by the Penang
state government. The mall is well positioned in an established commercial and industrial area serving the
niche market of shoppers from mainland Penang.
Rental basis For Feb 2010, about 33.8% of tenancies were based on the greater of a fixed base rent and turnover rent,
with the remaining tenancies on a fixed base rent basis
NLA (sq ft) 484,364 * No of tenancies 154
Parking bays (no) > 1,100 Top three tenants# (1) Parkson Department Store (12.9%)
Market value (RM m) 250 (2) GCH – Giant Hypermarket (5.5%)
Age of building (years) 3 (3) Sunway Carnival Convention Centre
(2.9%)
* 452,072 sq ft. retail, 32,292 sq ft. convention centre # % of gross rental income for the month of Feb 2010
Source: Company
RM
4 .0 0 100%
92% Fas hion & footwear
87% 94% 2 0 .7 %
3.82 2 7 .5 %
3.66 D epartment s tore
80%
3 .0 0
3.17 F&B
60% 4 .8 %
E duc ation & s ervic es
2 .0 0
40% 7 .4 %
L eis ure &
entertainment
1 .0 0 E lec tronic s
8 .5 % 1 8 .4 %
20%
1 2 .7 % O thers
0 .0 0 0%
FY 0 8 FY 0 9 8 M Feb1 0

Source: Company Source: Company
Page 5 of 18
RM psf
50% 5.0
45.6%
4.65
45% 42.0% 4.5
40% 4.0
3.64
35% 3.5
2.83
30% 2.92 3.0
25% 2.5
20% 2.0
15% 1.5
10% 1.0
4.4%
5% 2.9% 0.5
0% 0.0
As % of NLA
Source: Company
Property 3 – Sunway Ipoh Hypermarket
Brief description Strategically located in Sunway City Ipoh, an integrated township being developed by Suncity with
approximately 3,000 residentail and commercial properties by 2018. On top of residential and commercial
developments, the township also has leisure (Lost World of Tambun Theme Park), hospitality (The Banjaran
Hotsprings Retreat) and education properties. These properties are expected to attract domestic and
international visitors and increase the population in the catchment area of SunCity Ipoh Hypermarket.
Rental basis 6+3+3 lease agreement with monthly rental of RM214k in 2007, RM318k in 2008; RM334 in 2009 & 2010;
RM350k in 2011.
NLA (sq ft) 181,216 No of tenancies 1
Parking bays (no) 400 Top three tenants# Giant (100%)
Market value (RM m) 50
Age of building (years) 5
Source: Company
Page 6 of 18
Chart 11: Historical rental and occupancy rates
RM
2 .0 0 100% 100% 100% 100% 100%
90%
1.87 1.87
1.74 80%
1 .5 0
70%
60%
1 .0 0 1.17 50%
40%
30%
0 .5 0
20%
10%
0 .0 0 0%
FY 0 7 FY 0 8 FY 0 9 8 M F eb1 0
Rent ps f/month A vg oc c upanc y rate
Source: Company
Property 4 – Sunway Resort Hotel & Spa
Brief description A 19-storey five-star hotel, primarily serving business and upper leisure customers, with 439 guest rooms
and three villas. It is well positioned within Bandar Sunway with direct links to Sunway Pyramid Shopping
Mall, Sunway Pyramid Convention Centre, Pyramid Tower Hotel and Sunway Lagoon. The hotel enjoys a
strong corporate customer base with many business travellers to Petaling Jaya and Shah Alam choosing a
stay at the hotel in Bandar Sunway.
Rental basis Generally, the master lease agreements signed between Sunway REIT and the hotel operator (i.e. parent
Sunway City) are structured in such a way that there is approximately 80% guarantee to the expected
FY06/11 hotel rental revenues to Sunway REIT in FY06/11-12, and approximately 60% in FY06/13-20,
irrespective of the hotels’ performance. As such, Sunway REIT’s rental revenues from these hotels
effectively carry performance risks to a maximum of 20% of the expected FY06/11 hotel rental revenues in
FY06/11-12, and 40% in 06/13-20. The mitigating or balancing factor is that Sunway REIT also shares the
upside based on certain formulas if the hotels’ performance exceeds expectations.
GFA (sq ft) 1,050,497 Average room rate & occupancy rate
Parking bays (no) > 640 (1) FY06/07 – RM302 per night; 74.1%
Market value (RM m) 480 (2) FY06/08 – RM384 per night; 78%
Age of building (years) 13 years (Sunway Resort (3) FY06/09 – RM409 per night; 61%
Hotel & Spa) 6 years (4) 8MFY06/10 – RM397 per night; 66.1%
(three villas)
Source: Company
Page 7 of 18
Chart 12: Historical rental and occupancy rates Chart 13: Customer contribution (room revenue)
RM
500 100%
7 8 .0 % 90%
7 4 .1 %
400 80%
409
384 397 70%
300 6 6 .1 %6 0 % 40.9%
302 6 1 .0 %
50%
200 40%
30% 59.1%
100 20%
10%
0 0%
FY 0 7 FY 0 8 FY 0 9 8 M Feb1 0
C orporate L eis ure/O ther
A vg daily rate A vg oc c upanc y rate
Excluding three villas Room revenue for the month of Feb 2010
Property 5 – Pyramid Tower Hotel
Brief description A 9-storey four-star hotel in Bandar Sunway with 549 guest rooms targeted at value-conscious business
and leisure travellers. The hotel is well positioned within Bandar Sunway with direct links to Sunway
Pyramid Shopping Mall, Sunway Pyramid Convention Centre, Pyramid Tower Hotel and Sunway Lagoon,
with universities, offices, a medical centre and diverse food and beverage choices close by.
effectively carry performance risks to a maximum of 20% of the expected FY06/11 hotel rental revenues
in FY06/11-12, and 40% in 06/13-20. The mitigating or balancing factor is that Sunway REIT also shares
the upside based on certain formulas if the hotels’ performance exceeds expectations.
GFA (sq ft) 356,888 Average room rate & occupancy rate
Parking bays (no) > 530 (1) FY06/07 – RM174 per night; 86.8%
Market value (RM m) 270 (2) FY06/08 – RM223 per night; 82.1%
Age of building (years) 6 (3) FY06/09 – RM246 per night; 78.8%
(4) 8MFY06/10 – RM254 per night; 79.2%
Source: Company
Page 8 of 18
RM
300 100%
8 6 .8 %
8 2 .1 % 7 8 .8 % 7 9 .2 % 90% 20.3%
80%
246 254
70%
200 223
60%
174 50%
8
40%
100
30%
20%
10% 79.7%
0 0%
FY 0 7 FY 0 8 FY 0 9 8 M Feb1 0 C orporate L eis ure/O ther
Room revenue for the month of Feb 2010

Property 6 – Sunway Hotel Seberang Jaya
Brief description A 17-storey four-star hotel in Pusat Bandar Seberang Jaya, mainland Penang. The hotel is close to
industrial parks, namely Seberang Jaya Industrial Park, Prai Industrial Park, Bukit Tengah Industrial Park,
Bukit Minyak Industrial Park and Kulim Hi-Tech Park as well as within walking distance to Sunway Carnival
shopping mall and Sunway Carnival convention centre. It has 202 guest rooms, serving business travellers
seeking to access the industrial hubs and commercial zones located on Penang’s mainland. It is the only
four star hotel in the vicinity and the highest graded hotel on the mainland of Penang.
effectively carry performance risks to a maximum of 20% of the expected FY06/11 hotel rental revenues in
FY06/11-12, and 40% in 06/13-20. The mitigating or balancing factor is that Sunway REIT also shares the
upside based on certain formulas if the hotels’ performance exceeds expectations.
GFA (sq ft) 174,800 Average room rate & occupancy rate
Parking bays (no) 64 (1) FY06/07 – RM144 per night; 78.6%
Market value (RM m) 56 (2) FY06/08 – RM152 per night; 81.2%
Age of building (years) 13 (3) FY06/09 – RM153 per night; 78.8%
(4) 8MFY06/10 – RM158 per night; 76.7%
Source: Company
Page 9 of 18
RM
200 100%
8 1 .2 % 7 8 .8 % 90%
7 6 .7 %
7 8 .5 %
80%
150
153 158 70% 36.0%
152
144 60%
100 50%
8
40%
30%
64.0%
50
20%
10%
0 0%
FY 0 7 FY 0 8 FY 0 9 8 M Feb1 0 C orporate L eis ure/O ther
Room revenue for the month of Feb 2010

Property 7 – Menara Sunway
Brief description A 19-storey prime office building in Bandar Sunway. It comprises an office tower with an annex and more
than 660 car parking bays. Unlike a standalone office building, Menara Sunway is marketed as an office
environment, where its tenants can take advantage of the convention centre and the surrounding
hospitality, leisure and retail options offered by the Sunway Integrated Resort. We see relatively low
occupancy risk as compared to Sunway Tower, as the majority of the tenancies are with entities owned by
or affiliated with Sunway group of companies.
Rental basis Tenancy agreements are generally for terms of three years with an option to renew for another one to two
terms of two to three years each. Under the tenancies, tenants are normally responsible for payment of
their own utilities. Tenants are generally also responsible for repairs, as well as the payment of all other
expenses relating to the interior of the premises, while landlord is generally responsible for repairing the
exterior and main structure of the building.
NLA (sq ft) 268,978 No. of tenancies 36
Parking bays (no) > 600 Top three tenants # Sunway City - Sponsor (18.0%)
Market value (RM m) 138 Maxis Mobile Sdn Bhd (15.1%)
Age of building (years) 17 Sunway Management Sdn Bhd (14.2%)
# % of gross rental income for the month of Feb 2010
Source: Company
Page 10 of 18
RM
5 100%
M anagement s ervic es
9 7 .3 % 9 7 .7 % 90% 1 4 .0 %
9 4 .0 % 2 2 .9 % P roperty
4 8 8 .6 % 80% 3 .1 %
70% C ommunic ation
3 .2 %
3 60% C ons truc tion
3.22 3.29 3 .2 %
50%
2.79 M edic al
8 .0 %
2 2.46 40%
T ec hnology
30% 1 8 .0 %
1 20% T rading
1 2 .5 %
10% L eas ing
1 5 .1 %
0 0%
O ther trades
FY 0 7 FY 0 8 FY 0 9 8 M Feb1 0


RM psf
90% 4.0
78.8%
80% 3.44 3.5
70% 3.08 3.0
60% 2.63
2.5
2.35
50%
2.0
40%
1.5
30%
20% 15.7% 1.0
10% 0.5
1.7% 2.4%
0% 0.0
As % of NLA
Source: Company
Page 11 of 18
Property 8 – Sunway Tower
Brief description Strategically located in Kuala Lumpur’s Golden Triangle/CBD within proximity of many prime-grade office
buildings, international class four and five star hotels, high quality amenities and facilities, including several
major shopping centres. It is readily accessible from two nearby LRT stations and the Ampang-Kuala
Lumpur Elevated Highway.
Rental basis Tenancy agreements are generally for terms of three years with an option to renew for another one to two
terms of two to three years each. Under the tenancies, tenants are normally responsible for payment of
their own utilities. Tenants are generally also responsible for repairs, as well as the payment of all other
expenses relating to the interior of the premises, while landlord is generally responsible for repairing the
exterior and main structure of the building.
NLA (sq ft) 268,412 No. of tenancies 14
Parking bays (no) > 290 Top three tenants # Ranhill Worley Parsons Sdn Bhd (66.1%)
Market value (RM m) 185 Alcatel-Lucent Malaysia Sdn Bhd (18.9%)
Age of building (years) 14 Worley Parsons Service Sdn Bhd (4.5%)
# % of gross rental income for the month of Feb 2010
Source: Company
RM
1 .6 % 0 .5 %
5 100% C ons ultanc y (O &G )
1 .9 %
9 5 .9 % 2 .8 % 0 .2 %
90%
3 .3 % C ommunic ation
4 7 0 .1 % 80%
6 7 .1 % 4.27
70% A c c ounting
1 9 .1 %
3 3.48 60%
3.35 E mbas s y
50%
G love manufac turer
2 40%
30% C ons ultanc y

1 20% 7 0 .6 %
Food & beverages
10%
0 0% L eis ure &

entertainment
FY 0 8 FY 0 9 8 M Feb1 0

Page 12 of 18
RM psf
90% 85.7% 5.0
80% 4.5
4.40
70% 4.0
4.00 4.00 3.5
60%
3.0
50%
2.50 2.5
40%
2.0
30%
1.5
20% 1.0
10% 3.3% 78.8% 0.5
0.5%
0% 0.0
As % of NLA
Source: Company
♦ Growing young demographics to support private consumption and retail growth. We believe the
increasing young population in Malaysia, which tends to have higher propensity of spending, will be the key driver
for private consumption growth. Since 2000 to 2009, private consumption grew by a CAGR of 6.7%, from
RM155.9bn to RM278.8bn, which is in line with the expanding size of young demographics. This should support
the net income growth of Sunway REIT, which is largely retail-based. For 2010, RHBRI’s economics team projects
private consumption to grow by 4.8% to RM292.1bn in the early stage of global economic recovery cycle. In
terms of private consumption’s share of GDP, it grew steadily from 43.8% in 2000 to 53.7% in 2009, which is
close to RHBRI’s forecast of 53.8% for 2010.
Independent global data provider Business Monitor International projects Malaysia’s retail sales to grow at a
CAGR of 14% between 2009 and 2013, from US$30.5bn (RM97.6bn) to US$51.6bn (RM165.1bn), underpinned
by “a low unemployment rate, rising disposal income, strong tourism industry, growing urbanization and
improved standards of living for rural dwellers” (see Chart 26). This is consistent with our positive view on the
retail sector in Malaysia, backed by a vibrant consumer sector.
Chart 24: Faster rising population aged 15 - 64
'000 RM
3 0 ,0 0 0
1 8 ,0 0 0
2 5 ,0 0 0
1 5 ,0 0 0
2 0 ,0 0 0
1 2 ,0 0 0
9 ,0 0 0 1 5 ,0 0 0
6 ,0 0 0 1 0 ,0 0 0
3 ,0 0 0 5 ,0 0 0
0 0
1970
1975
1980
1985
1990
1995
2000
2005
P op. aged 1 5 - 6 4 P op. aged 0 -1 4

P op. aged >6 4 G D P per c apita (bas e year 2 0 0 0 )
Source: DOS
Page 13 of 18
Chart 25: Private consumption growth Chart 26: Retail sales in Malaysia
RM bn
US$bn
350 55 60
5 1 .6
300
50
4 4 .2
250
50 3 7 .9
40
3 3 .2
200 3 0 .4 3 0 .5
30 2 4 .1
150
1 9 .8
45
100 20
50 10
0 40
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010f
2006 2007e 2008e 2009f 2010f 2011f 2012f 2013f
P rivate c ons umption P rivate c ons umption's s hare of GD P
Source: DOS Source: Business Monitor International
♦ A pool of assets available from Sponsor for future expansion in asset size. Sunway REIT plans to double
its asset base in five years time. In our view, this does not appear to be a tall order given parent Sunway City still
holds a decent portfolio of “REITable” assets including Sunway Medical Centre, Sunway University College and
Monash University Sunway Campus, as well as various investment properties under development such as the
newly completed Sunway Giza. Under the agreement, Sunway REIT has the first rights of refusal, which means in
the event if Suncity intends to offer its investment properties for sale to any third party at a specific offer price
and at specific terms, Suncity shall first extend the offer to Sunway REIT at the same or better offer price and
terms. However, we opine that, for Suncity to inject the new assets into the REIT, it may probably take 4 – 5
years time until the new assets mature. As such, over the intermediate term, acquisition of new properties is
likely to come from external. To recap, Sunway Medical Centre, Sunway University College and Monash University
Sunway Campus were not included in Sunway REIT during its IPO as the properties either had just completed a
major expansion or were embarking on one. We believe the earnings volatility arising from temporary disruption
in operations, and hence lower yield, made them less suitable to be included into Sunway REIT. In our view, this
will change as and when their operations normalise and yields show signs of stability over the medium term.
Chart 27: Potential acquisition targets from Sponsor

Already in operation Under planning
(1) Sunway Medical Centre (1) Sunway South Quay - a mixed development within Bandar Sunway
(2) Sunway University College (2) 28-storey commercial development adjacent to Sunway Pyramid Shopping Mall
(3) Monash University Sunway Campus (3) The Pinnacle - a new 25-storey office tower in Bandar Sunway
(4) Sunway Giza Shopping Mall, Sunway Damansara (4) Sunway Monash University Residence - student hostels
(5) Sunway Hotel Georgetown, Penang (5) Sunway Velocity - a RM1.5bn mixed commercial development in KL
(6) Sunway Hotel, Phnom Penh (6) Sunway Damansara - an integrated development township
Source: Company
Concerns And Mitigating Factors
♦ Substantial interest rate hikes that affect borrowing costs. Unless interest rate is raised substantially by
Bank Negara Malaysia, we believe gradual increases in interest rate (25 bps per hike) will have mild impact on
Sunway REIT’s finance costs. Currently, Sunway REIT has a capital structure that will be able to reduce
refinancing risk as well as to provide a hedge against movements in interest rates. Current gearing stood at about
30%, and exposure to fixed and variable rates is about equal. Weighted average tenure for the RM1bn term loan
is three years. Given the various tranches of term loan maturity (2, 3 and 4 years), refinancing risk is therefore
relatively low over the short term.
Page 14 of 18
Chart 28: Term loan (RM 1bn) maturity profile Chart 29: Fixed vs variable rate mix (term loan RM1bn)
RM mil
450
400
350
300
60 240
250
200 201 Fixed rate, V ariable rate,

4 9 .9 % 5 0 .1 %
150
240
100
160
50 99
0
2 year 3 year 4 year
Fixed rate V ariable rate
♦ Subdued office sector in the Klang Valley. The office sector in the Klang Valley is expected to remain
subdued over the short to medium term, weighed down by massive incoming new supply. International property
consultants CBRE estimated that in 2010-2013, in terms of NLA, 21.4m sqf will come into the market, translating
to 28% of total supply of 77m sqf as at end 2009. For Sunway REIT, the mitigating factor is, in terms of value,
office properties only make up 9% of Sunway REIT’s total asset base. In addition, the occupancy risk at Menara
Sunway is low given that it is about 60% occupied by Sunway group of companies. As for Sunway Tower, bulk of
its lease expiry (85.7% of NLA mostly tenanted by Ranhill Worley Parsons and Alcatel-Lucent) is concentrated in
FY12, which is still relatively remote from now.
Chart 30: Future supply of office space in the Klang Valley Chart 31: Avg rental psf/month for Golden Triangle, CBD
and Damansara Heights
NLA (mil sqf )
12 RM psf
7 .0 0
10
3.3 6 .0 0
8
5 .0 0
6
0.3 4 .0 0
4
0 7.1
1.6 3 .0 0
2 3.9
2.4 2.8
2 .0 0
0
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
2010 2011 2012 2 0 1 2 /1 3

G olden T riangle C entral Bus ines s D is tric t
Kuala Lumpur Selangor
D amans ara H eights
Source: CBRE Source: Knight Frank
♦ Tenant concentration risk. Sunway REIT has relatively low tenant concentration risk, considering its diversed
group of tenants for most of its properties. Among the eight properties, only Sunway Tower and SunCity Ipoh
Hypermarket are exposed to high tenant concentration risk. For Sunway Tower, Ranhill Worley Parsons and
Alcatel make up about 90% of the property’s gross rental income. As for SunCity Ipoh Hypermarket, the sole
tenant is Giant Hypermarket. Nevertheless, the mitigating factor is that, both properties contribute less than 5%
of our FY11 total revenue forecast for Sunway REIT.
Page 15 of 18
FINANCIAL OUTLOOK
♦ Rising retail sales to underpin higher rental rates of shopping malls. We believe the continued growth in
retail sales in Malaysia will support better rental reversion (growth) of shopping malls, driving Sunway REIT’s
baseline organic growth. Between FY06/07 and 8MFY06/10, average monthly net rental of Sunway Pyramid
Shopping Mall, which dominates more than 60% of Sunway REIT’s asset value, grew at a CAGR of 4.3% from
RM7.93 psf to RM8.99 psf. This was despite the onslaught of the global financial crisis in 2008 – 2009. In our
earnings forecasts, we estimate Sunway Pyramid Shopping Mall’s steady net monthly rental growth at 2-3% per
annum for FY11-FY13, underpinned by a brighter macroeconomic outlook, and Bandar Sunway’s growing
population base as well as influx of students, tourists and medical tourists.
JLW Research estimated that Bandar Sunway’s population base grew at a CAGR of 4% between 2000 and 2009,
from 437,121 to 622,160. We believe the growth rate will sustain going forward, underpinned by, among others,
a new component of Bandar Sunway called Sunway South Quay. The middle-upper market lakeside homes
project will house 4,000 new households in Bandar Sunway over its project period estimated at seven years.
Based on Malaysia’s average urban household size of 4.5 people in 2000, this translates to 18,000 potential new
residents in Bandar Sunway. In addition, we foresee increased arrivals of students and medical tourists to Bandar
Sunway with continued expansion of Sunway Medical Centre, Sunway International School, Sunway University
Campus and Monash University Sunway Campus, and tourists on the back of continuous government-sponsored
tourism promotional efforts in overseas markets. All these will translate to higher levels of commercial activities
and demand for support services that will in turn draw in even more traffic to Bandar Sunway.
Chart 32: Resilient rental rates at Sunway Pyramid Shopping Mall
Data is shown on a December year-end basis. Gross rentals inclusive of the convention centre but excluding car park, the ice skating
rink and promotion.
Source: Jones Lang Wootton Market Overview Report dated 27 May 2010
♦ Gross gearing. Currently, Sunway REIT has a gearing (total borrowings/total assets) of about 30%, which is in
line with the MREIT sector average. To fund its future acquisitions, Sunway REIT has the capability to gear up
further, but capped below 50% as required under the SC guidelines on REITs. Internally, management has a
gearing target of 40%. Hence, we estimate that Sunway REIT will have the capacity to raise an additional
RM300m-350m. Nevertheless, over the longer term, we expect Sunway REIT to fund acquisitions via a
combination of placement and borrowings, to have a balance between gearing and dilution on EPU.
♦ Distribution policy. According to Sunway REIT prospectus, the REIT Manager intends to distribute at least
100% of Distributable Income for FY10 and FY11. According to our forecasts, this translates to a DPU of 6.7 sen
and 7.3 sen for FY11 and FY12, suggesting a yield of about 7-8%. Note that, we have not imputed any
contribution from potential yield accretive acquisitions in the future. Beyond FY11, the distribution policy is at
least 90%.
Page 16 of 18
VALUATION
♦ Initiate coverage with Outperform recommendation. In line with our valutations for the REIT sector, we
apply a target MREIT yield of 7% on our FY12 DPU forecast of 7.3 sen for Sunway REIT. Our indicative fair value
is therefore RM1.05 (IPO price for institutional and retail investors was RM0.90 and RM0.88). We intiate coverage
on Sunway REIT with an Outperform rating.
Table 2. Earnings Forecasts

FYE June (RMm) 2010f 2011f 2012f 2013f
Revenue 302.2 330.9 340.6 353.3
Gross Profit 258.8 280.2 293.6 303.1
EBIT 260.7 218.6 243.9 255.7
Interest income 0.0 0.0 0.0 0.0
Finance costs (38.7) (47.6) (47.6) (47.6)
PBT 221.9 171.0 196.3 208.1
Exceptional item 88.8 0.0 0.0 0.0
Tax + minority interest 0.0 9.9 0.0 0.0
Normalised net profit 164.2 180.9 196.3 208.1
Normalised EPU 6.1 6.7 7.3 7.8
Gross DPU 6.1 6.7 7.3 7.8
Dividend payout 100.0 100.0 100.0 100.0
Source: Company, RHBRI estimates
Table 3. Balance Sheet And Cashflow Forecasts

FYE June (RMm) 2010f 2011f 2012f 2013f
Non-current assets 3,729.0 3,739.0 3,739.3 3,739.7
Current assets 51.7 39.3 41.5 44.3
Total assets 3,780.7 3,778.3 3,780.7 3,784.0
Unitholders’ capital 2,680.1 2,680.1 2,680.1 2,680.1

Reserves (1,486.6) (1,486.6) (1,486.6) (1,486.6)
Retained earnings 1,416.7 1,416.7 1,416.7 1,416.7
Minority interest 0.0 (9.9) (9.9) (9.9)
Unitholders fund 2,610.3 2,600.4 2,600.4 2,600.4
Long term liabilities 1,010.5 1,010.5 1,010.5 1,010.5

Current liabilities 159.9 167.3 169.8 173.1
Cash Flow (RMm) 2010f 2011f 2012f 2013f

Operating cash flow 187.3 223.6 245.6 257.9
Investing cash flow (553.6) (10.0) (0.3) (0.4)
financing cash flow 3,304.0 (228.5) (243.9) (255.7)
Source: Company, RHBRI estimates
Page 17 of 18
IMPORTANT DISCLOSURES
This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The
opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or
be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any
manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons
may from time to time have an interest in the securities mentioned by this report.
This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or
strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts
any liability for any loss or damage arising out of the use of all or any part of this report.
RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB
Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity
securities or loans of any company that may be involved in this transaction.
“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other
services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.
This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.
The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.
The recommendation framework for stocks and sectors are as follows : -
Stock Ratings
Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.
Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.
Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.
Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.
Industry/Sector Ratings
Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.
Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.
Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.
RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended
securities, subject to the duties of confidentiality, will be made available upon request.
This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the
actions of third parties in this respect.
Page 18 of 18

Sunway REIT: The Goliath of MREITs - 23/09/2010

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Sunway REIT: The Goliath of MREITs - 23/09/2010

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Sunway REIT Share Price

Table 1 : Investment Statistics (SUNREIT; Code: 5176) Bloomberg: SREIT MK

Please read important disclosures at the end of this report. Page 1 of 18

Chart 2: Market cap of MREITs

Chart 3: Total assets of MREITs

Source: Company (dated 20th July 2010)

Property 1 – Sunway Pyramid Shopping Mall

9 .5 0 100% F as hion & footwear

N et rent ps f/month A vg oc c upanc y rate

Chart 7: Projected lease expiry schedule

N et rent ps f/month A vg oc c upanc y rate

Property 3 – Sunway Ipoh Hypermarket

2 .0 0 100% 100% 100% 100% 100%

Rent ps f/month A vg oc c upanc y rate

Property 4 – Sunway Resort Hotel & Spa

Property 5 – Pyramid Tower Hotel

A vg daily rate A vg oc c upanc y rate

Room revenue for the month of Feb 2010

Property 6 – Sunway Hotel Seberang Jaya

A vg daily rate A vg oc c upanc y rate

Room revenue for the month of Feb 2010

Property 7 – Menara Sunway

N et rent ps f/month A vg oc c upanc y rate

Gross rental income for the month of Feb 2010

Chart 20: Projected lease expiry schedule

30% C ons ultanc y

0 0% L eis ure &

N et rent ps f/month A vg oc c upanc y rate

Gross rental income for the month of Feb 2010

Chart 24: Faster rising population aged 15 - 64

P op. aged 1 5 - 6 4 P op. aged 0 -1 4

Source: DOS Source: Business Monitor International

Chart 27: Potential acquisition targets from Sponsor

Concerns And Mitigating Factors

200 201 Fixed rate, V ariable rate,

Fixed rate V ariable rate

Source: Company Source: Company

2010 2011 2012 2 0 1 2 /1 3

Source: CBRE Source: Knight Frank

Chart 32: Resilient rental rates at Sunway Pyramid Shopping Mall

Table 2. Earnings Forecasts

Table 3. Balance Sheet And Cashflow Forecasts

Unitholders’ capital 2,680.1 2,680.1 2,680.1 2,680.1

Long term liabilities 1,010.5 1,010.5 1,010.5 1,010.5

Cash Flow (RMm) 2010f 2011f 2012f 2013f

The recommendation framework for stocks and sectors are as follows : -

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