Asia Pacific Equity Research 19 August 2021 Malaysia REITs Reopening within reach We remain optimistic about “reopening” as the Malaysian government has moved to the benchmark of daily number of “symptomatic hospital admission cases”, away from the absolute level of COVID-19 cases, in its National Recovery Plan (NRP). With 78% of the Klang Valley (Selangor/KL) population where the majority of the M-REIT properties are located having already received its first dose and the prospect of the COVID-19 curve peaking at end-August (link), we anticipate reopening of the malls from October onwards, initially for fully vaccinated individuals with a further easing thereafter. Despite 2021 being effectively a “writeoff” after we cut our FY21E DPU by 19-48% post pricing in six months of rental waivers, we anticipate the market to be more forward-looking as we are only four months away from a potential strong recovery in 2022. Our preferred pick remains Sunway REIT as it provides the greatest leverage to an upturn, with an attractive combination of a 5.3% FY22E net yield and a three-year DPU CAGR of 33%. New protocols for reopening have been implemented with easing restrictions for fully vaccinated individuals such as dining in (states under Phase 2) and selective resumption of select industries. In addition, rather than basing the phased easing of restrictions on the level of COVID-19 cases, a shift has been made to the daily number of “symptomatic hospital admission cases” given the backdrop of 53% and 35% of the Malaysian population having received its first dose and being fully vaccinated. In comparison, under the original NRP, malls in Klang Valley may have only opened towards the end of the year, given a still high level of daily cases (>8,000) versus our base case of October. Near-term pain. While we see light at the end of the tunnel, we expect near-term pressure for the M-REITs, given they need to support their retail tenants. To that end, we now assume six months of rental waivers in FY21 (up from 2-3 months in 1H21) and one month in FY22. In addition, we also assume minimal contribution from hotels this year. Furthermore, we expect retail rents to be cut by 5-6% p.a. over FY21/22. Overall we cut FY21/22E DPU by 19-48%/6-10% and lower our Sunway REIT/KLCC/IGB REIT June-22 PTs to RM1.60/RM7.40/RM1.65. Only four months away from 2022 recovery. 2021 has been a disappointment with ineffective lockdowns earlier this year triggering an escalation in COVID-19 cases and tightening of measures. Nevertheless, we believe investors already see 2021 as a write-off and will progressively focus on 2022 recovery over the coming months. In addition, with 70-80% of the population likely to be fully vaccinated by October, Malaysia switching to Pfizer and the shift in protocol for a phased reopening, we remain confident of share price recovery for the M-REITs on the back of an upturn in profitability next year. Malaysia Conglomerates and Property Mervin Song, CFA AC (65) 6882-7829 mervin.song@jpmorgan.com Bloomberg JPMA MSONG J.P. Morgan Securities Singapore Private Limited Terence M Khi (65) 6882-1518 terence.ml.khi@jpmchase.com J.P. Morgan Securities Singapore Private Limited Cusson Leung, CFA (852) 2800-8526 cusson.leung@jpmorgan.com J.P. Morgan Securities (Asia Pacific) Limited/ J.P. Morgan Broking (Hong Kong) Limited Jeffrey Ng (60-3) 2718 0713 Jeff.Ng@jpmorgan.com JPMorgan Securities (Malaysia) Sdn. Bhd. (18146-X) See page 17 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.jpmorganmarkets.com Mervin Song, CFA (65) 6882-7829 mervin.song@jpmorgan.com Asia Pacific Equity Research 19 August 2021 Equity Ratings and Price Targets Company Ticker Mkt Cap Price ($ mn) CCY Price IGB REIT IGBREIT MK 1,410 MYR 1.69 KLCCP Stapled Group KLCCSS MK 2,855 MYR 6.70 Sunway REIT SREIT MK 1,140 MYR 1.41 Source: Company data, Bloomberg Finance L.P., J.P. Morgan estimates. n/c = no change. All prices as of 19 Aug 21. Rating Cur Prev N n/c OW n/c OW n/c Price Target Cur End Prev End Date Date 1.65 Jun-22 1.70 Dec-21 7.40 Jun-22 7.50 Dec-21 1.60 Jun-22 1.65 Dec-21 Table 1: JP Morgan coverage - M-REITs peer comparison M-REITs IGB REIT KLCC Stapled Group Sunway REIT JPM Rating N OW OW Mkt Cap (US$ m) 1,441 2,833 1,156 5,430 Sh Price 18-Aug-21 (LC) 1.71 6.65 1.43 Source: Bloomberg Finance L.P., J.P. Morgan estimates. Price Target (LC) 1.65 7.40 1.60 Net Yield DPU Growth 20 Day YTD Upside FYE P/B FY21E FY22E FY21E FY22E ADTV (%) (%) (US$m) -3.5% Dec 1.56 2.5% 4.2% -29.6% 65.9% 0.1 -0.6% 11.3% Dec 0.92 3.5% 4.7% -12.8% 33.0% 0.1 -6.1% 11.9% Dec 0.96 2.5% 5.3% -2.1% 112.9% 0.2 -4.7% 1.10 3.0% 4.7% -14.9% 58.7% -4.3% Shifting gears under National recovery plan (NRP) Under Malaysia’s original National Recovery Plan (NRP), the country would progressively open its economy under various phases subject to the level of daily cases nationally and within each state, status of the health system and percentage of the population that has been fully vaccinated. Despite good progress in vaccination rates, due to still elevated cases (>20,000), the Malaysian government has shifted towards a phased reopening, subject to the daily number of ‘symptomatic hospital admission cases’ in Category 3 (with pneumonia), 4 (with pneumonia, requiring oxygen therapy) and 5 (critical and requiring assisted ventilation) as a new threshold indicator. Furthermore, in view of the difficult economic situation, for states which are under Phase 1 of the NRP, such as Klang Valley, restrictions on 11 types of economic activities were lifted for fully vaccinated individuals on 15 August. The 11 types of businesses include barbers and hair salons, car wash shops, electrical shops, outlets selling household appliances and kitchen supplies, furniture, and sport equipment shops. Furthermore, car accessories workshops, car sales showrooms, morning and farmer’s markets, clothing and personal accessories stores as well jewelry stores also qualify. Once states enter Phase 2 of the NRP, an additional 11 business activities will also be allowed to open such as photography and photo services shops, second-hand item stores, flower shops and plant nurseries, handicraft and souvenir shops and antique shops, toy stores, carpet shops, as well as cosmetics, skin care and perfume stores. 2 Mervin Song, CFA (65) 6882-7829 mervin.song@jpmorgan.com Asia Pacific Equity Research 19 August 2021 Table 2: Type of threshold categories Category Category 1 Category 2 Category 3 Category 4 Category 5 Source: COVID-19 Immunization Task Force, The Edge. Symptoms No symptoms Mild symptoms With pneumonia With pneumonia, requiring oxygen therapy Critical and requiring assisted ventilation Table 3: Original Phases of National Recovery Plan Phase Number of daily Health system % population vaccinated Commentary cases (nationwide) / ICU capacity with 2nd dose Phase 1 Only essential services allowed Phase 2 Less than 4,000 Moderate 10% Earliest expected August 2021 - More economic sectors like manufacturing and electrical and electronics allowed to operate with 80% max capacity - Social sectors remain closed Phase 3 Less than 2,000 Comfortable 40% Earliest expected date : September-October 2021 - All manufacturing, majority of economic sectors allowed to operate, except high risk activities, e.g., conventions, night clubs, pubs, spas and beauty salons - industries with fully vaccinated staff can request to operate at full capacity - Education, sporting and some social activities allowed to resume - Parliament can resume under strict SOPs Phase 4 Less than 500 Safe / secure 60% Earliest expected : November-December 2021 - All economic sectors and majority of social sectors allowed to resume - Interstate travel and domestic tourism allowed, subject to strict SOPs Source: The Edge Markets, New Straits Times, Malay Mail, Ministry of International Trade and Industry. Figure 1: New COVID-19 cases by state/total new cases New cases by state (LHS)/ total new cases (RHS) 25,000 20,000 15,000 10,000 5,000 0 13-Sep 13-Oct 13-Nov 13-Dec 13-Jan 13-Feb 13-Mar 13-Apr 13-May 13-Jun 13-Jul 13-Aug Total KL Selangor Source: Ministry of Health, Department of Statistics. 3 Mervin Song, CFA (65) 6882-7829 mervin.song@jpmorgan.com Asia Pacific Equity Research 19 August 2021 Figure 2: Total COVID-19 cases in Malaysia and by state Total no. of cases by state (LHS)/total cases (RHS) 600,000 500,000 400,000 300,000 200,000 100,000 0 Total KL Selangor Source: Ministry of Health, Department of Statistics. 1,609,000 1,409,000 1,209,000 1,009,000 809,000 609,000 409,000 209,000 9,000 Greater easing for Klang Valley malls from October Despite the current political uncertainties and still high daily COVID-19 cases, given the increasing vaccination rates and the government’s increasing focus on livelihoods as demonstrated by a shift in its approach to the NRP and selective resumption of various activities, we now assume that malls within the Klang Valley, where the majority of M-REIT assets are located, will be allowed to open from October onwards. In such a scenario, we now assume around 6 months of rental waivers, comprising 2-3 months of tenant support in 1H21 and 3-4 months in 2H21, to account for the closure of malls except for essential services over 3Q21 and 1 month of support as more stores reopen. This compares to our original projection of 1.5-2 months of tenant support. Furthermore, we have conservatively assumed 1 month of rental waivers in 2022, to account for any flare up in COVID-19 cases that may require a temporary tightening of measures. To account for expected pressure on rents, we have also assumed a 5-6% p.a. decline in rents over FY21-22E versus 2-5% previously, with recovery in occupancy only from FY23. For KLCC and Sunway REIT’s hotel segments, we now assume minimal contributions in FY21 despite homestays and hotel stays, in states under Phase 2 of the NRP, being allowed from 10 August onwards for those fully vaccinated, with a recovery only in FY22 when domestic interstate travel is expected to resume when most of the population is fully vaccinated. 4 Mervin Song, CFA (65) 6882-7829 mervin.song@jpmorgan.com Asia Pacific Equity Research 19 August 2021 Table 4: Number of vaccination registrations State Johor Kedah Kelantan KL Labuan Melaka Negri Sembilan Pahang Pulau Pinang Perak Perlis Putrajaya Sabah Sarawak Selangor Terengganu Total Number of registrations 2,611,821 1,241,982 818,529 1,893,468 61,513 626,257 820,427 920,533 1,284,978 1,504,449 161,679 87,238 1,357,496 1,692,100 4,950,770 654,542 20,687,782 Source: Ministry of Health Malaysia. As at 18 August 2021. % of population 96.3% 80.6% 66.2% 100.0% 89.8% 92.5% 100.0% 78.3% 94.0% 80.8% 89.2% 100.0% 49.2% 82.8% 100.0% 81.0% 85.5% Table 5: Number of first-dose vaccinations State Johor Kedah Kelantan KL Labuan Melaka Negri Sembilan Pahang Pulau Pinang Perak Perlis Putrajaya Sabah Sarawak Selangor Terengganu Total Number of first doses 1,691,172 857,955 636,467 2,598,763 68,101 456,820 695,626 666,573 992,157 1,029,112 134,236 122,146 1,335,646 1,824,160 3,809,661 518,691 17,437,286 Source: Ministry of Health Malaysia. As at 18 August 2021. % of population 44.7% 39.3% 33.4% 146.5% 68.4% 49.0% 61.6% 39.7% 55.9% 41.0% 52.7% 111.0% 34.2% 64.8% 58.3% 41.2% 53.4% Table 6: Number of first-dose vaccinations in Klang Valley State Kuala Lumpur Putrajaya Selangor Total Number of first doses 2,598,763 122,146 3,809,661 6,530,570 Source: Ministry of Health Malaysia. As at 18 August 2021. % of population 146.5% 111.0% 58.3% 77.6% Overall, after the weaker-than-expected results from IGBREIT (link) and KLCC (link), we reduce our Sunway REIT/KLCC/IGB REIT FY21/22E gross DPU by 1948%/6-10% and lower our Sunway REIT/KLCC/ IGB REIT June-22 PT to RM1.60/RM7.40/RM1.65. Nevertheless, we remain convinced of a recovery in earnings and share prices ahead with only 4 months to go before the potential 2022 recovery, once 70-80% of the population is fully vaccinated by October, from 32% currently (53% of the population has already received the first dose and 85% have registered for vaccination) and the economy is progressively reopened. Furthermore, in our view, 5 Mervin Song, CFA (65) 6882-7829 mervin.song@jpmorgan.com Asia Pacific Equity Research 19 August 2021 the majority of investors have already discounted the lower level of profitability and DPU owing to the ongoing closure of many retail outlets since May. Our top pick remains Sunway REIT owing to its leveraged exposure to a recovery (three-year DPU CAGR of 33%) and as it offers the highest FY22E net yield of 5.3%. We also like KLCC given the majority of its earnings are anchored by its long office lease with Petronas. Finally, we are N on IGB REIT, as we believe the risk-reward is balanced, with an expected bounce in DPU next year offset by forward yields that are already comparable to KLCC’s and the lack of defensive earnings stream from long office leases. Table 7: Change in gross DPU estimates REIT IGB REIT KLCC Sunway REIT Previous gross DPU (Mcts) 1FY 2FY 3FY 7.1 8.7 8.8 32.4 36.9 38.3 7.7 9.4 9.8 Source: J.P. Morgan estimates. New gross DPU (Mcts) 1FY 2FY 3FY 4.8 7.9 8.7 26.2 34.8 37.6 4.0 8.4 9.6 Change 1FY 2FY 3FY -33% -9% -1% -19% -6% -2% -48% -10% -2% Table 8: Change in PTs REIT IGBREIT KLCCSS Sunway REIT Previous rating N OW OW Source: J.P. Morgan estimates. New rating N OW OW Previous PT (M$) 1.70 7.50 1.65 Revised PT (M$) 1.65 7.40 1.60 6 Mervin Song, CFA (65) 6882-7829 mervin.song@jpmorgan.com Asia Pacific Equity Research 19 August 2021 Table 9: Malaysia national lockdown measures Measure Movement Control Order (MCO) Enhanced Movement Control Date 18-31 Mar 2020 1-14 Apr 2020 Description All places of worship and business premises to be closed, except supermarkets, public markets, grocery stores, and stores selling basic necessities Limit on operating hours for supermarkets, grocery shops, convenience stores and petrol stations of 8am and 8pm Order MCO Extension 15 Apr to 3 May Limited reopening, including hardware stores 2020 Conditional Movement Control 4 May to 9 Jun Order (CMCO) 2020 Almost all economic sectors allowed to be open with conditions Dining-in at restaurants allowed Recovery Movement Control Order (RMCO) 10 Jun to 13 Oct Business operations to return to normal, with adherence to the necessary standard operating procedures (SOPs). Open/morning/night markets, bazaars, food courts, hawker centers, food trucks and food stalls to be allowed. 2020 Haircuts and beauty treatments at salons. Conditional Movement Control Order (CMCO) - Klang Valley, Selangor, Kuala Lumpur and 14 Oct 2020 to 12 Jan 2021 Dining-in restricted to 4-5 pax/table Inter-district travel will be banned, while employees need to show work pass or employers' consent All schools, kindergartens, nurseries, public parks and recreational centers will be closed Places of worship, entertainment centers and night clubs will be closed Putrajaya Sports, recreational, social, cultural activities, including weddings not allowed All economic, industry and manufacturing activities in Selangor, Kuala Lumpur and Putrajaya are still allowed to operate as usual Movement Control Order (MCO) 2.0 – Selangor, KL, Johor and Penang 13 Jan to 4 March 2021 All places of social gatherings including weddings, seminars and sports and only allowing 2 people to travel in a car and buy groceries within a 10km radius from home. In addition, eateries and hawker stalls to only provide takeaway services and deliveries. However, from 21 January restaurants, food stalls and food deliveries can operate from 6am until 10pm vs. the previous limit of 8pm but dine-in at restaurants is still not allowed Only five essential economic sectors are allowed to operate: manufacturing, construction, services, trade and distribution, and plantations and commodities. Shopping malls are still allowed to operate Non-essential services staff to work from home Conditional Movement Control Order (CMCO) - Klang Valley, Selangor, Johor, Kuala Lumpur 5 Mar to 28 Apr 2021 All permitted businesses can operate daily from 6am- 12am (eateries and food delivery services may now operate until 6am during the Ramadan period). Dine-in at restaurants and F&B outlets is now allowed with 1 meter of social distancing and adherence to SOP. There are no more restrictions on the number of patrons per table and Penang Interstate travel still banned in CMCO states (ex. essential business, emergency, medical & education purposes) The previous ruling of only allowing 30% of employees to work from the office has been abolished. All employees in the private sector can return to work in offices from 1 April onwards Movement Control Order (MCO) 3.0 – KL, Nationwide effective 12 May 7-31 May 2021 Interstate and inter district travel not allowed All social gatherings prohibited including weddings, dinner and birthday parties Only three people allowed in private vehicles, taxis and e-hailing vehicles Ban on dine-in; only takeaways and deliveries allowed. F&B outlets such as restaurants, food trucks, food traders, and kiosks to operate from 6am to midnight Convenience stores, sundry shops, shops selling daily necessities, and pharmacies to operate from 6am to 10pm All economic sectors are allowed to operate but maximum of only 30% of employees allowed to work in the office All sports and recreational activities prohibited except individual activities Full Movement Control Order (FMCO) 1-28 June 2021 Only essential economic sectors and services will be allowed to operate Food outlets to close by 8pm Only 2 people per household allowed in one vehicle (including the driver) within 10km radius from home Shopping malls are closed except for supermarkets, hypermarkets, the F&B and essential items section of departmental stores, pharmacies, personal care stores, convenience stores, mini markets, and F&B outlets Worker capacity not more than 60 per cent of the workforce FMCO rolled into Phase 1 of From 28 June Eateries can now open for takeaway and delivery from 6am to 10pm NRP – all states 2021 Phase 2 of National Recovery From 5 July 2021 Plan (NRP) – Perlis, Perak, Kelantan, Terengganu, Pahang Phase 1 of National Recovery From 5 August Plan (NRP) – Selangor, KL 2021 Office capacity must not exceed 40% Worker capacity in the private sector for essential services can be increased to 80% Select sectors such as manufacturing (automotive, rubber, iron and steel) and trade & distributions (book and stationary stores, computers and telecommunications) can reopen and allowed to operate from 8am to 8pm Farmers and morning markets allowed to operate from 7am to 11am more food items, but weekly markets, night markets are still banned. 11 sectors allowed to resume including barbers and hair salons, car wash shops, electrical shops, outlet selling household appliances and kitchen supplies, furniture, and sport equipment shops. Furthermore, car accessories workshops, car sales showrooms, morning and farmers’ markets, clothing and personal accessories stores as well jewelry stores also qualify. Source: The Edge Markets, New Straits Times, Malay Mail, Ministry of International Trade and Industry. 7 Mervin Song, CFA (65) 6882-7829 mervin.song@jpmorgan.com Asia Pacific Equity Research 19 August 2021 Neutral IGB REIT IGRE.KL,IGBREIT MK Price (19 Aug 21): RM1.69 Investment Thesis, Valuation and Risks ▼ Price Target (Jun-22): RM1.65 Prior (Dec-21): RM1.70 Malaysia Conglomerates and Property Mervin Song, CFA AC (65) 6882-7829 mervin.song@jpmorgan.com Bloomberg JPMA MSONG J.P. Morgan Securities Singapore Private Limited IGB Real Estate Investment Trust (Neutral; Price Target: RM1.65) Investment Thesis Due to the impact of recent lockdowns, we believe IGBREIT’s near-term earnings/DPU will be under pressure owing to about six months of rental support that it may need to provide its tenants in FY21. With prospects of malls reopening in October 2021, and combined with the strong track record and dominant position of IGB REIT’s two properties, Mid Valley and the Garden’s Mall, we believe IGB REIT will be on the cusp of a recovery soon. However, we believe a large proportion of these positives and expected recovery in DPU are priced in already, given Key Changes (FYE Dec) IGBREIT trades on a low 4% FY22E yield which is 1.8 s.d. below mean. In our Gross DPS - 21E (RM) Gross DPS - 22E (RM) Prev Cur FY21-22 estimates, we have assumed a 5% decline in rents and a further 2-3% drop 0.071 0.048 in occupancy. In addition, we see better value in other M-REITs such as KLCC, 0.087 0.079 which we believe offers a comparable yield but greater resiliency in income, or Style Exposure Sunway REIT, which we believe offers a higher yield and DPU growth over the next 2-3 years. Hence, we maintain our Neutral recommendation. Sources for: Style Exposure – J.P. Morgan Quantitative and Derivatives Strategy; all other tables are company data and J.P. Morgan estimates. Valuation Our Jun-22 PT of RM1.65 is based on our DDM valuation with a discount rate of 6.8%, a risk free rate of 3.6% and a terminal growth rate of 2%. Our PT implies a forward FY22 net yield spread (assuming a 10-year Malaysia bond yield of 3.6%) of 0.7% (2.4 s.d. below mean). We have pegged valuations to the FY22E yield, which we believe is a fairer benchmark, given we expect a normalized operation environment in 2022 versus 2021. In addition, we believe a below-average yield spread is justified, given the expected DPU recovery. Risks to Rating and Price Target Key upside risks include: Faster-than-expected economic recovery and re-opening, leading to greater-thanexpected tenant sales. This in turn would translate into higher rents and occupancy than projected. Acquisition of Mid Valley Southkey would provide upside to our earnings estimates. Key downside risks include: Higher-than-expected cash payments of manager fees or lower payout ratio to conserve cash would result in a lower-than-expected DPU. Subsequent waves of COVID-19 cases in Malaysia necessitating another MCO or additional social measures such as extension of the current MCO which would affect traffic and spend in malls leading to lower-than-expected vacancies and rents. Steepening of the yield curve and increase in the 10-year Malaysian government bond yield may result in investors shifting out of M-REITs, including IGB REIT. 8 Mervin Song, CFA (65) 6882-7829 mervin.song@jpmorgan.com Asia Pacific Equity Research 19 August 2021 Price Performance YTD Abs -0.6% Rel 5.7% Company Data Shares O/S (mn) 52-week range (RM) Market cap ($ mn) Exchange rate Free float(%) 3M - Avg daily vol (mn) 3M - Avg daily val ($ mn) Volatility (90 Day) Index BBG BUY|HOLD|SELL Key Metrics (FYE Dec) RM in millions Financial Estimates NOI Adj. EBITDA FFO per share BBG FFOPS AFFO per share Gross DPS Margins and Growth NOI margin NOI growth EBITDA margin EBITDA growth Ratios Adj. tax rate FFO payout AFFO payout Net debt/EBITDA ROA ROE Valuation Net debt/EV Dividend yield EV/EBITDA EV/Revenue Adj. P/E P/FFO P/AFFO P/ BV 1m 3m 12m 1.8% 1.8% -3.9% 1.6% 5.9% -0.6% 3,535 1.90-1.59 1,410 4.24 22.7% 0.56 0.2 16 FBMKLCI - FTSE BURSA MALAYSIA KLCI 6|6|1 FY20A 317 284 0.07 0.06 0.07 0.068 68.1% (20.6%) 61.0% (21.6%) 0.0% 0.9 0.9 3.5 5.0% 6.9% 0.1 4.0% 24.3 14.8 23.2 23.2 23.2 1.6 FY21E 238 210 0.05 0.08 0.05 0.048 73.9% (24.7%) 65.1% (26.0%) 0.0% 1.0 1.0 4.9 3.4% 4.7% 0.1 2.8% 33.0 21.5 33.8 33.8 33.8 1.6 FY22E 353 319 0.08 0.09 0.08 0.079 71.2% 48.3% 64.2% 51.9% 0.0% 1.0 1.0 3.0 5.7% 7.8% 0.1 4.7% 21.5 13.8 20.4 20.4 20.4 1.6 FY23E 385 349 0.09 0.09 0.09 0.087 72.3% 8.9% 65.5% 9.3% 0.0% 1.0 1.0 2.7 6.2% 8.6% 0.1 5.2% 19.6 12.8 18.4 18.4 18.4 1.6 Summary Investment Thesis and Valuation Due to the impact of recent lockdowns, we believe IGBREIT’s near-term earnings/DPU will be under pressure owing to about six months of rental support that it may need to provide its tenants in FY21. With prospects of malls reopening in October 2021, and combined with the strong track record and dominant position of IGB REIT’s two properties, Mid Valley and the Garden’s Mall, we believe IGB REIT will be on the cusp of a recovery soon. However, we believe a large proportion of these positives and expected recovery in DPU are priced in already, given IGBREIT trades on a low 4% FY22E yield which is 1.8 s.d. below mean. In our FY21-22 estimates, we have assumed a 5% decline in rents and a further 2-3% drop in occupancy. In addition, we see better value in other M-REITs such as KLCC, which we believe offers a comparable yield but greater resiliency in income, or Sunway REIT, which we believe offers a higher yield and DPU growth over the next 2-3 years. Hence, we maintain our Neutral recommendation. Our Jun-22 PT of RM1.65 is based on our DDM valuation with a discount rate of 6.8%, a risk free rate of 3.6% and a terminal growth rate of 2%. Our PT implies a forward FY22 net yield spread (assuming a 10-year Malaysia bond yield of 3.6%) of 0.7% (2.4 s.d. below mean). We have pegged valuations to the FY22E yield, which we believe is a fairer benchmark, given we expect a normalized operation environment in 2022 versus 2021. In addition, we believe a below-average yield spread is justified, given the expected DPU recovery. Performance Drivers Source: J.P. Morgan Quantitative and Derivatives Strategy for Performance Drivers; company data, Bloomberg Finance L.P. and J.P. Morgan estimates for all other tables. Pricing history may not be complete or exact. 9 Mervin Song, CFA (65) 6882-7829 mervin.song@jpmorgan.com Asia Pacific Equity Research 19 August 2021 IGB REIT: Summary of Financials Income Statement Revenue COGS Net property income Adj. EBITDA D&A Adj. EBIT Revaluation gains/(losses) Net Interest Adj. PBT Tax Minority Interest Adj. Net Income Distributable profit Funds from operations (FFO) Adjusted funds from operations (AFFO) Reported EPS Adj. EPS FFO per share Payout ratio (x) AFFO per share Payout ratio (x) DPS Shares outstanding Balance Sheet Cash and cash equivalents Accounts receivable Other current assets Current assets PP&E Investment properties LT investments Other non current assets Total assets FY19A FY20A FY21E FY22E FY23E 552 465 323 497 532 (146) (146) (151) (149) (153) 399 317 238 353 385 362 284 210 319 349 - - - - - 362 284 210 319 349 - - - - - (46) (47) (48) (41) (40) 316 237 162 278 309 0 0 0 0 0 - - - - - 342 260 178 297 329 325 241 170 282 312 342 260 178 297 329 342 260 178 297 329 0.09 0.07 0.05 0.08 0.09 0.10 0.07 0.05 0.08 0.09 0.10 0.07 0.05 0.08 0.09 0.9 0.9 1.0 1.0 1.0 0.10 0.07 0.05 0.08 0.09 0.9 0.9 1.0 1.0 1.0 0.092 0.068 0.048 0.079 0.087 3,545 3,563 3,565 3,574 3,584 FY19A FY20A FY21E FY22E FY23E 226 222 179 258 287 30 35 24 36 39 0 0 0 0 0 255 257 203 294 326 6 4 4 4 4 4,960 4,960 4,960 4,961 4,961 - - - - - 4,960 4,960 4,960 4,961 4,961 5,221 5,221 5,167 5,259 5,291 Cash Flow Statement Cash flow from operating activities o/w Depreciation & amortization o/w Changes in working capital Cash flow from investing activities o/w Capital expenditure as % of sales Cash flow from financing activities o/w Dividends paid o/w Shares issued/(repurchased) o/w Net debt issued/(repaid) Net change in cash Adj. Free cash flow to firm y/y Growth Valuation P/FFO (x) P/AFFO (x) P/E (x) P/BV (x) EV/EBITDA (x) Dividend Yield Ratio Analysis NOI margin EBITDA margin EBIT margin Net profit margin FFO margin ROE ROA ROCE Short term borrowings Payables Other short term liabilities Current liabilities Long-term debt Other long term liabilities Total liabilities 15 - 223 238 1,199 0 1,437 15 - 206 221 1,200 0 1,420 15 - 143 158 1,200 0 1,357 15 - 220 235 1,200 0 1,434 Shareholders' equity Minority interests Total liabilities & equity 3,784 3,801 3,810 3,825 - - - - 5,221 5,221 5,167 5,259 BVPS 1.07 1.07 1.07 1.07 y/y Growth 0.1% 0.1% 0.0% 0.1% Net debt/(cash) 989 992 1,036 956 Source: Company reports and J.P. Morgan estimates. Note: RM in millions (except per-share data).Fiscal year ends Dec. o/w - out of which 15 - 235 250 1,200 0 1,450 3,841 - 5,291 1.07 0.1% 927 Net debt/Equity Net debt/EBITDA Sales/Assets (x) Assets/Equity (x) Interest cover (x) Operating leverage Debt/Investment properties Tax rate Revenue y/y Growth EBITDA y/y Growth EPS y/y Growth FY19A 392 0 5 FY20A 287 0 (20) FY21E 174 0 (52) FY22E 403 0 65 FY23E 381 0 12 7 6 5 6 7 (0) (0) (0) (0) (0) 0.1% 0.1% 0.1% 0.1% 0.1% (381) (297) (223) (329) (359) (328) (244) (170) (282) (312) 0 0 0 0 0 0 0 0 0 0 18 (4) (43) 80 28 438 334 222 444 420 2.0% (23.8%) (33.5%) 100.1% (5.4%) FY19A 17.5 17.5 17.5 1.6 19.0 5.4% FY20A 23.2 23.2 23.2 1.6 24.3 4.0% FY21E 33.8 33.8 33.8 1.6 33.0 2.8% FY22E 20.4 20.4 20.4 1.6 21.5 4.7% FY23E 18.4 18.4 18.4 1.6 19.6 5.2% FY19A 72.2% 65.5% 65.5% 61.9% 61.9% FY20A 68.1% 61.0% 61.0% 55.9% 55.9% FY21E 73.9% 65.1% 65.1% 55.3% 55.3% FY22E 71.2% 64.2% 64.2% 59.8% 59.8% FY23E 72.3% 65.5% 65.5% 61.8% 61.8% 9.1% 6.9% 4.7% 7.8% 8.6% 6.6% 5.0% 3.4% 5.7% 6.2% 7.3% 5.7% 4.2% 6.3% 6.9% 0.3 0.3 0.3 0.2 0.2 2.7 3.5 4.9 3.0 2.7 0.1 0.1 1.4 1.4 7.9 6.0 109.2% 137.0% 24.5% 24.5% 0.0% 0.0% 0.1 1.4 4.4 85.0% 24.5% 0.0% 0.1 0.1 1.4 1.4 7.7 8.8 96.3% 130.1% 24.5% 24.5% 0.0% 0.0% 3.1% (15.7%) (30.6%) 53.9% 7.2% 3.4% (21.6%) (26.0%) 51.9% 9.3% (0.1%) (24.4%) (31.4%) 65.9% 10.4% 10 Mervin Song, CFA (65) 6882-7829 mervin.song@jpmorgan.com Asia Pacific Equity Research 19 August 2021 Overweight KLCCP Stapled Group KLCC.KL,KLCCSS MK Price (19 Aug 21): RM6.70 Investment Thesis, Valuation and Risks ▼ Price Target (Jun-22): RM7.40 Prior (Dec-21): RM7.50 Malaysia Conglomerates and Property Mervin Song, CFA AC (65) 6882-7829 mervin.song@jpmorgan.com Bloomberg JPMA MSONG KLCCP Stapled Group (Overweight; Price Target: RM7.40) Investment Thesis We have an OW rating and a Jun-22 PT of RM7.40 for KLCC. We are attracted to KLCC’s long office leases (8-15 years) anchored with Petronas. Combined with inbuilt escalations every three years (equivalent to 3% p.a.) for the majority of these leases, we believe KLCC offers investors a degree of resilience amidst the current uncertain environment. J.P. Morgan Securities Singapore Private Limited Suria KLCC and Mandarin Oriental Kuala Lumpur have been impacted by the recent Key Changes (FYE Dec) lockdowns, translating into about 6 months of rental waivers in FY21. However, we Gross DPS - 21E (RM) Gross DPS - 22E (RM) Prev Cur remain positive on an eventual recovery of both properties on the back of vaccine 0.324 0.262 rollout, which should result in greater reopening of Suria KLCC in October 2021 and 0.369 0.348 resumption of interstate travel in FY22. We estimate this should translate into an 8% Style Exposure three-year DPU CAGR (FY20-FY23E). Sources for: Style Exposure – J.P. Morgan Quantitative and Derivatives Strategy; all other tables are company data and J.P. Morgan estimates. Valuation Our Jun-22 PT of RM7.40 is based on our DDM valuation, which uses a 6.4% discount rate, a 3.6% risk free rate and a 1.5% terminal growth rate. The implied FY22 net yield spread based on our PT stands at 0.7% (0.5 s.d above its mean yield spread) assuming a 3.6% Malaysian 10-year bond yield. We believe a slightly higher than average yield spread is appropriate given tougher operating conditions for the hotel and retail segments. In addition, pegging KLCC’s valuation to FY22E is appropriate given FY22 better represents normalized earnings compared to FY21. Risks to Rating and Price Target Key downside risks to our rating and price target include: Lower-than-expected retail rents owing to a slower-than-expected recovery after the lockdown in Malaysia. Longer-than-expected travel restrictions resulting in a delayed recovery in RevPAR for Mandarin Oriental Kuala Lumpur. Extension of the current MCO and subsequent waves of COVID-19 cases resulting in imposition of additional social distancing measures or lockdowns causing a negative impact on economic activity and resulting in lower rents, occupancy and RevPAR. 11 Mervin Song, CFA (65) 6882-7829 mervin.song@jpmorgan.com Asia Pacific Equity Research 19 August 2021 Price Performance YTD Abs -6.1% Rel 0.2% Company Data Shares O/S (mn) 52-week range (RM) Market cap ($ mn) Exchange rate Free float(%) 3M - Avg daily vol (mn) 3M - Avg daily val ($ mn) Volatility (90 Day) Index BBG BUY|HOLD|SELL Key Metrics (FYE Dec) RM in millions Financial Estimates NOI Adj. EBITDA FFO per share BBG FFOPS AFFO per share Gross DPS Margins and Growth NOI margin NOI growth EBITDA margin EBITDA growth Ratios Adj. tax rate FFO payout AFFO payout Net debt/EBITDA ROA ROE Valuation Net debt/EV Dividend yield EV/EBITDA EV/Revenue Adj. P/E P/FFO P/AFFO P/ BV 1m -0.9% -1.1% 3m -2.2% 1.9% 12m -16.1% -12.8% 1,805 8.10-6.58 2,855 4.24 12.8% 0.13 0.2 10 FBMKLCI - FTSE BURSA MALAYSIA KLCI 5|6|1 FY20A 859 815 0.33 0.36 0.33 0.300 69.4% (22.6%) 65.8% (23.4%) 10.9% 0.9 0.9 1.8 3.0% 4.2% 0.1 4.5% 16.2 10.7 22.1 20.1 20.6 0.9 FY21E 780 738 0.31 0.38 0.31 0.262 72.0% (9.2%) 68.2% (9.4%) 13.2% 0.8 0.8 2.0 2.8% 3.9% 0.1 3.9% 17.8 12.1 23.8 21.7 21.7 0.9 FY22E 1,048 1,000 0.40 0.42 0.40 0.348 76.9% 34.4% 73.4% 35.5% 13.2% 0.9 0.9 1.3 3.7% 5.1% 0.1 5.2% 13.0 9.6 17.9 16.7 16.7 0.9 FY23E 1,133 1,084 0.43 0.44 0.43 0.376 77.1% 8.1% 73.7% 8.4% 13.2% 0.9 0.9 1.1 4.0% 5.5% 0.1 5.6% 11.9 8.8 16.6 15.5 15.5 0.9 Summary Investment Thesis and Valuation We have an OW rating and a Jun-22 PT of RM7.40 for KLCC. We are attracted to KLCC’s long office leases (8-15 years) anchored with Petronas. Combined with in-built escalations every three years (equivalent to 3% p.a.) for the majority of these leases, we believe KLCC offers investors a degree of resilience amidst the current uncertain environment. Suria KLCC and Mandarin Oriental Kuala Lumpur have been impacted by the recent lockdowns, translating into about 6 months of rental waivers in FY21. However, we remain positive on an eventual recovery of both properties on the back of vaccine rollout, which should result in greater reopening of Suria KLCC in October 2021 and resumption of interstate travel in FY22. We estimate this should translate into an 8% three-year DPU CAGR (FY20-FY23E). Our Jun-22 PT of RM7.40 is based on our DDM valuation, which uses a 6.4% discount rate, a 3.6% risk free rate and a 1.5% terminal growth rate. The implied FY22 net yield spread based on our PT stands at 0.7% (0.5 s.d above its mean yield spread) assuming a 3.6% Malaysian 10-year bond yield. We believe a slightly higher than average yield spread is appropriate given tougher operating conditions for the hotel and retail segments. In addition, pegging KLCC’s valuation to FY22E is appropriate given FY22 better represents normalized earnings compared to FY21. Performance Drivers Source: J.P. Morgan Quantitative and Derivatives Strategy for Performance Drivers; company data, Bloomberg Finance L.P. and J.P. Morgan estimates for all other tables. Pricing history may not be complete or exact. 12 Mervin Song, CFA (65) 6882-7829 mervin.song@jpmorgan.com Asia Pacific Equity Research 19 August 2021 KLCCP Stapled Group: Summary of Financials Income Statement Revenue Property operating expenses Net property income Adj. EBITDA D&A Revaluation gains/(losses) Net Interest Associate Adj. PBT Tax Minority Interest Adjustments to NP Adj. Net Income Distributable profit Funds from operations (FFO) Adjusted funds from operations (AFFO) Reported EPS Adj. EPS FFO per share Payout ratio (x) AFFO per share Payout ratio (x) Gross DPS Net DPS Shares outstanding Balance Sheet Cash and cash equivalents Accounts receivable Other current assets Current assets PP&E Investment properties LT investments Other non current assets Total assets Short term borrowings Payables Other short term liabilities Current liabilities Long-term debt Other long term liabilities Total liabilities Shareholders' equity Minority interests Total liabilities & equity FY19A FY20A FY21E FY22E FY23E 1,423 1,238 1,083 1,362 1,470 (360) (423) (345) (362) (386) 1,110 859 780 1,048 1,133 1,063 815 738 1,000 1,084 (43) (50) (49) (49) (48) - - - - - (80) (88) (88) (87) (85) 13 13 14 15 16 1,014 662 616 879 966 (126) (72) (81) (116) (127) (156) (43) (27) (88) (108) - - - - - 733 547 508 676 730 730 550 508 676 730 773 600 557 724 778 734 588 557 724 778 0.44 0.24 0.28 0.37 0.40 0.41 0.30 0.28 0.37 0.40 Cash Flow Statement Cash flow from operating activities o/w Depreciation & amortization o/w Changes in working capital Cash flow from investing activities o/w Capital expenditure as % of sales Cash flow from financing activities o/w Dividends paid o/w Shares issued/(repurchased) o/w Net debt issued/(repaid) Net change in cash Adj. Free cash flow to firm y/y Growth 0.43 0.9 0.41 0.9 0.380 0.355 1,805 0.33 0.9 0.33 0.9 0.300 0.276 1,805 0.31 0.8 0.31 0.8 0.262 0.240 1,805 0.40 0.9 0.40 0.9 0.348 0.319 1,805 0.43 0.9 0.43 0.9 0.376 0.345 1,805 Valuation P/FFO (x) P/AFFO (x) P/E (x) P/BV (x) EV/EBITDA (x) Dividend Yield FY19A FY20A FY21E FY22E FY23E 884 872 936 1,085 1,217 479 509 499 518 525 15555 1,367 1,388 1,441 1,609 1,748 672 638 634 631 627 15,894 15,693 15,693 15,693 15,693 - 279 276 290 305 321 Ratio Analysis NOI margin EBITDA margin Net profit margin FFO margin ROE ROA ROCE 18,211 17,995 18,059 18,239 18,390 Net debt/Equity 29 430 430 430 430 258 258 225 284 306 23 17 17 17 17 310 705 673 731 753 2,317 1,919 1,951 1,982 2,014 2,372 2,357 2,357 2,357 2,357 4,999 4,981 4,981 5,070 5,124 13,212 13,014 13,079 13,168 13,266 - - - - - Net debt/EBITDA Sales/Assets (x) Assets/Equity (x) Interest cover (x) Operating leverage Debt/Investment properties Tax rate Revenue y/y Growth EBITDA y/y Growth 18,211 17,995 18,059 18,239 18,390 EPS y/y Growth BVPS 7.30 7.19 7.22 7.27 y/y Growth 0.8% (1.6%) 0.4% 0.6% Net debt/(cash) 1,463 1,478 1,445 1,328 Source: Company reports and J.P. Morgan estimates. Note: RM in millions (except per-share data).Fiscal year ends Dec. o/w - out of which 7.32 0.7% 1,227 FY19A 1,041 43 59 FY20A 808 50 (22) FY21E 644 49 (22) FY22E 935 49 40 FY23E 986 48 15 (99) (28) (45) (45) (45) (40) (13) 0 0 0 2.8% 1.0% 0.0% 0.0% 0.0% (793) (793) (535) (741) (809) (673) (630) (433) (576) (623) 0 0 0 0 0 91 2 32 32 32 148 (12) 64 149 132 1,071 874 720 1,010 1,060 14.0% (18.4%) (17.6%) 40.3% 4.9% FY19A 15.6 16.5 16.5 0.9 12.4 5.7% FY20A 20.1 20.6 22.1 0.9 16.2 4.5% FY21E 21.7 21.7 23.8 0.9 17.8 3.9% FY22E 16.7 16.7 17.9 0.9 13.0 5.2% FY23E 15.5 15.5 16.6 0.9 11.9 5.6% FY19A 78.0% 74.7% 51.5% 54.3% FY20A 69.4% 65.8% 44.2% 48.5% FY21E 72.0% 68.2% 46.9% 51.4% FY22E 76.9% 73.4% 49.6% 53.2% FY23E 77.1% 73.7% 49.7% 52.9% 5.6% 4.2% 3.9% 5.1% 5.5% 4.1% 3.0% 2.8% 3.7% 4.0% 5.8% 4.4% 3.9% 5.3% 5.7% 0.1 0.1 0.1 0.1 0.1 1.4 1.8 2.0 1.3 1.1 0.1 0.1 0.1 0.1 0.1 1.4 1.4 1.4 1.4 1.4 13.3 9.3 8.4 11.5 12.7 74.3% 192.6% 78.7% 147.4% 111.6% 14.8% 15.0% 15.2% 15.4% 15.6% 12.4% 10.9% 13.2% 13.2% 13.2% 1.2% (13.0%) (12.5%) 25.8% 7.9% 1.4% (23.4%) (9.4%) 35.5% 8.4% 0.8% (25.3%) (7.1%) 33.0% 8.0% 13 Mervin Song, CFA (65) 6882-7829 mervin.song@jpmorgan.com Asia Pacific Equity Research 19 August 2021 Overweight Sunway REIT SUNW.KL,SREIT MK Price (19 Aug 21): RM1.41 ▼ Price Target (Jun-22): RM1.60 Prior (Dec-21): RM1.65 Investment Thesis, Valuation and Risks Sunway Real Estate Investment Trust (Overweight; Price Target: RM1.60) Malaysia Conglomerates and Property Mervin Song, CFA AC (65) 6882-7829 mervin.song@jpmorgan.com Bloomberg JPMA MSONG J.P. Morgan Securities Singapore Private Limited Key Changes (FYE Dec) Gross DPS - 21E (RM) Gross DPS - 22E (RM) Prev 0.077 0.094 Cur 0.040 0.084 Style Exposure Investment Thesis We believe the strong positioning of Sunway Pyramid, Sunway REIT’s key asset, and exposure to healthcare and education properties with in-built escalations positions the REIT for a robust recovery as social distancing measures are relaxed. Near term, we expect Sunway REIT to still need to support tenants, and we assume about six months of rental waivers in CY21, given potential for its malls to only open in October. In addition, we assume a 3-6% p.a. drop in signing rents over the next couple of years and a 2- to 4-point fall in occupancy for Sunway REIT’s retail portfolio. The hotel portfolio will also be impacted by the downturn in the tourism industry and disruption from refurbishment of Sunway Resort over the next 12-18 months. Nevertheless, RevPAR should rebound in CY22 as the domestic travel market recovers once interstate travel is allowed. We project a three-year DPU CAGR of 33% after declines in FY20/21E DPU on the back of normalization of business activities, as rental waivers dissipate and ~350,000 sqft expansion of Sunway Carnival. Sources for: Style Exposure – J.P. Morgan Quantitative and Derivatives Strategy; all other tables are company data and J.P. Morgan estimates. Valuation Our Jun-22 PT of RM1.60 is based on our DDM, which uses a 7.5% discount rate, a 3.6% risk-free rate and a 2% terminal growth. Our PT implies a forward FY22 net yield of 4.7% and yield spread of 1.1% (-2.1 s.d. below mean). We believe pegging to FY22E, when earnings will be less disrupted by the refurbishment of its hotels, better reflects a normalized period; pegging to FY21E would unduly penalize Sunway REIT. Our implied yield spread is also ~30bps higher than the implied yield spread for IGB REIT, slightly lower than the historical differential between the two REITs of ~50bps. Risks to Rating and Price Target Key downside risks include: A slower-than-economic recovery due to another wave of COVID-19 cases, resulting in lower-than-projected occupancy, rents and average daily room rates. Delays in opening and/or higher-than-expected costs (RM436m) for the Carnival Mall extension. Competition from e-commerce, resulting in a greater-than-expected impact on retail rents. A larger-than-expected impact from new retail, office and hotel supply. 14 Mervin Song, CFA (65) 6882-7829 mervin.song@jpmorgan.com Asia Pacific Equity Research 19 August 2021 Price Performance YTD Abs -4.7% Rel 1.6% Company Data Shares O/S (mn) 52-week range (RM) Market cap ($ mn) Exchange rate Free float(%) 3M - Avg daily vol (mn) 3M - Avg daily val ($ mn) Volatility (90 Day) Index BBG BUY|HOLD|SELL Key Metrics (FYE Dec) RM in millions Financial Estimates NOI Adj. EBITDA FFO per share BBG FFOPS AFFO per share Gross DPS Margins and Growth NOI margin NOI growth EBITDA margin EBITDA growth Ratios Adj. tax rate FFO payout AFFO payout Net debt/EBITDA ROA ROE Valuation Net debt/EV Dividend yield EV/EBITDA EV/Revenue Adj. P/E P/FFO P/AFFO P/ BV 1m 3m 12m 0.7% -1.4% -8.9% 0.5% 2.8% -5.6% 3,425 1.72-1.34 1,140 4.24 32.8% 1.20 0.4 19 FBMKLCI - FTSE BURSA MALAYSIA KLCI 3|9|3 FY20A 315 276 0.06 0.08 0.04 0.041 70.2% (31.6%) 61.6% (33.9%) 0.0% 0.7 0.9 10.8 2.0% 3.7% 0.4 2.9% 29.4 18.1 24.1 24.1 32.5 0.9 FY21E 289 252 0.05 0.08 (0.11) 0.040 69.7% (8.3%) 60.8% (8.8%) 0.0% 0.9 NM 13.8 1.7% 3.1% 0.4 2.8% 34.3 20.8 30.6 30.6 NM 0.9 FY22E 449 406 0.09 0.10 0.08 0.084 74.0% 55.3% 66.9% 61.2% 0.0% 0.9 1.1 8.6 3.3% 6.0% 0.4 6.0% 21.3 14.3 15.6 15.6 18.6 0.9 FY23E 503 458 0.10 0.10 0.09 0.096 74.8% 12.0% 68.1% 12.7% 0.0% 0.9 1.1 7.7 3.7% 6.8% 0.4 6.8% 19.0 13.0 13.9 13.9 16.2 0.9 Summary Investment Thesis and Valuation We believe the strong positioning of Sunway Pyramid, Sunway REIT’s key asset, and exposure to healthcare and education properties with in-built escalations positions the REIT for a robust recovery as social distancing measures are relaxed. Near term, we expect Sunway REIT to still need to support tenants, and we assume about six months of rental waivers in CY21, given potential for its malls to only open in October. In addition, we assume a 3-6% p.a. drop in signing rents over the next couple of years and a 2- to 4-point fall in occupancy for Sunway REIT’s retail portfolio. The hotel portfolio will also be impacted by the downturn in the tourism industry and disruption from refurbishment of Sunway Resort over the next 12-18 months. Nevertheless, RevPAR should rebound in CY22 as the domestic travel market recovers once interstate travel is allowed. We project a three-year DPU CAGR of 33% after declines in FY20/21E DPU on the back of normalization of business activities, as rental waivers dissipate and ~350,000 sqft expansion of Sunway Carnival. Our Jun-22 PT of RM1.60 is based on our DDM, which uses a 7.5% discount rate, a 3.6% risk-free rate and a 2% terminal growth. Our PT implies a forward FY22 net yield of 4.7% and yield spread of 1.1% (-2.1 s.d. below mean). We believe pegging to FY22E, when earnings will be less disrupted by the refurbishment of its hotels, better reflects a normalized period; pegging to FY21E would unduly penalize Sunway REIT. Our implied yield spread is also ~30bps higher than the implied yield spread for IGB REIT, slightly lower than the historical differential between the two REITs of ~50bps. Performance Drivers Source: J.P. Morgan Quantitative and Derivatives Strategy for Performance Drivers; company data, Bloomberg Finance L.P. and J.P. Morgan estimates for all other tables. Pricing history may not be complete or exact. 15 Mervin Song, CFA (65) 6882-7829 mervin.song@jpmorgan.com Asia Pacific Equity Research 19 August 2021 Sunway REIT: Summary of Financials Income Statement Revenue COGS Net property income Adj. EBITDA D&A Adj. EBIT Revaluation gains/(losses) Net Interest Adj. PBT Tax Minority Interest Adj. Net Income Distributable profit Funds from operations (FFO) Adjusted funds from operations (AFFO) Reported EPS Adj. EPS FFO per share Payout ratio (x) AFFO per share Payout ratio (x) DPS Shares outstanding Balance Sheet Cash and cash equivalents Accounts receivable Other current assets Current assets PP&E Investment properties LT investments Other non current assets Total assets FY19A FY20A FY21E FY22E FY23E 608 449 415 607 673 (148) (134) (126) (158) (170) 461 315 289 449 503 418 276 252 406 458 - - - - - 418 276 252 406 458 - - - - - (115) (99) (93) (95) (106) 303 177 159 312 351 00000 - - - - - 303 177 159 312 351 303 177 159 312 351 303 177 159 312 351 226 132 (375) 262 301 0.10 0.06 0.05 0.09 0.10 0.10 0.06 0.05 0.09 0.10 0.10 0.06 0.05 0.09 0.10 1.0 0.7 0.9 0.9 0.9 0.08 0.04 (0.11) 0.08 0.09 1.3 0.9 NM 1.1 1.1 0.099 0.041 0.040 0.084 0.096 2,925 3,036 3,456 3,456 3,456 FY19A FY20A FY21E FY22E FY23E 76 445 87 104 99 141 113 91 127 141 00000 217 558 178 231 240 - - - - - 8,084 8,544 9,079 9,129 9,179 - - - - - 8,097 8,574 9,108 9,158 9,208 8,313 9,132 9,286 9,389 9,449 Cash Flow Statement Cash flow from operating activities o/w Depreciation & amortization o/w Changes in working capital Cash flow from investing activities o/w Capital expenditure as % of sales Cash flow from financing activities o/w Dividends paid o/w Shares issued/(repurchased) o/w Net debt issued/(repaid) Net change in cash Adj. Free cash flow to firm y/y Growth Valuation P/FFO (x) P/AFFO (x) P/E (x) P/BV (x) EV/EBITDA (x) Dividend Yield Ratio Analysis NOI margin EBITDA margin EBIT margin Net profit margin FFO margin ROE ROA ROCE Net debt/Equity Short term borrowings 0 1,218 1,360 1,408 1,446 Net debt/EBITDA Payables - - - - - Other short term liabilities 95 187 145 200 222 Sales/Assets (x) Current liabilities 95 1,404 1,506 1,609 1,668 Assets/Equity (x) Long-term debt 3,226 2,200 2,200 2,200 2,200 Interest cover (x) Other long term liabilities 530 428 428 428 428 Operating leverage Total liabilities 3,852 4,033 4,134 4,237 4,296 Debt/Investment properties Tax rate Shareholders' equity 4,462 5,099 5,152 5,152 5,152 Minority interests 0 0 0 0 0 Revenue y/y Growth Total liabilities & equity 8,313 9,132 9,286 9,389 9,449 EBITDA y/y Growth EPS y/y Growth BVPS 1.51 1.49 1.49 1.49 1.49 y/y Growth 2.4% (1.7%) 0.1% 0.0% 0.0% Net debt/(cash) 3,150 2,973 3,474 3,505 3,547 Source: Company reports and J.P. Morgan estimates. Note: RM in millions (except per-share data).Fiscal year ends Dec. o/w - out of which FY19A 441 0 23 FY20A 267 0 (10) FY21E 232 0 (20) FY22E FY23E 425 466 0 0 19 8 (721) (407) (528) (77) (46) (534) 12.7% 10.2% 128.8% (48) (48) (50) (50) 8.2% 7.4% 293 508 (283) (169) 0 710 321 141 (62) (361) (423) (86) (292) (332) 0 0 0 143 48 38 13 368 (358) 17 (5) 479 320 (209) 470 522 (20.3%) (33.1%) (165.2%) (325.1%) 11.1% FY19A FY20A 13.6 24.1 18.3 32.5 13.6 24.1 0.9 0.9 19.9 29.4 7.0% 2.9% FY21E 30.6 NM 30.6 0.9 34.3 2.8% FY22E FY23E 15.6 13.9 18.6 16.2 15.6 13.9 0.9 0.9 21.3 19.0 6.0% 6.8% FY19A 75.7% 68.8% 68.8% 49.8% 49.8% FY20A 70.2% 61.6% 61.6% 39.5% 39.5% FY21E 69.7% 60.8% 60.8% 38.4% 38.4% FY22E FY23E 74.0% 74.8% 66.9% 68.1% 66.9% 68.1% 51.3% 52.2% 51.3% 52.2% 6.9% 3.7% 3.1% 6.0% 6.8% 3.8% 2.0% 1.7% 3.3% 3.7% 5.6% 3.4% 2.9% 4.7% 5.2% 0.7 0.6 0.7 7.5 10.8 13.8 0.7 0.7 8.6 7.7 0.1 0.1 1.8 1.8 3.6 2.8 98.2% 129.4% 40.4% 40.6% 0.0% 0.0% 0.0 1.8 2.7 116.0% 42.3% 0.0% 0.1 0.1 1.8 1.8 4.3 4.3 132.0% 117.3% 41.1% 41.6% 0.0% 0.0% (27.9%) (26.2%) (7.6%) (27.4%) (33.9%) (8.8%) (27.9%) (43.6%) (21.1%) 46.4% 10.8% 61.2% 12.7% 95.7% 12.8% 16 Mervin Song, CFA (65) 6882-7829 mervin.song@jpmorgan.com Asia Pacific Equity Research 19 August 2021 Analyst Certification: The Research Analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple Research Analysts are primarily responsible for this report, the Research Analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the Research Analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect the Research Analyst’s personal views about any and all of the subject securities or issuers; and (2) no part of any of the Research Analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the Research Analyst(s) in this report. For all Korea-based Research Analysts listed on the front cover, if applicable, they also certify, as per KOFIA requirements, that the Research Analyst’s analysis was made in good faith and that the views reflect the Research Analyst’s own opinion, without undue influence or intervention. All authors named within this report are Research Analysts unless otherwise specified. In Europe, Sector Specialists (Sales and Trading) may be shown on this report as contacts but are not authors of the report or part of the Research Department. Important Disclosures Market Maker/ Liquidity Provider: J.P. Morgan is a market maker and/or liquidity provider in the financial instruments of/related to IGB REIT, KLCCP Stapled Group, Sunway REIT. Manager or Co-manager: J.P. Morgan acted as manager or co-manager in a public offering of securities or financial instruments (as such term is defined in Directive 2014/65/EU) of/for KLCCP Stapled Group within the past 12 months. Client: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as clients: KLCCP Stapled Group. Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as investment banking clients: KLCCP Stapled Group. Investment Banking Compensation Received: J.P. Morgan has received in the past 12 months compensation for investment banking services from KLCCP Stapled Group. Potential Investment Banking Compensation: J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from KLCCP Stapled Group. Debt Position: J.P. Morgan may hold a position in the debt securities of IGB REIT, KLCCP Stapled Group, Sunway REIT, if any. Company-Specific Disclosures: Important disclosures, including price charts and credit opinion history tables, are available for compendium reports and all J.P. Morgan–covered companies, and certain non-covered companies, by visiting https://www.jpmm.com/research/disclosures, calling 1-800-477-0406, or e-mailing research.disclosure.inquiries@jpmorgan.com with your request. IGB REIT (IGRE.KL, IGBREIT MK) Price Chart 3 N RM1.665 2 N RM1.8 N RM1.75 N RM1.8 N RM1.7 Date Rating Price (RM) 23-Nov-18 N 1.69 31-Jul-19 N 1.93 18-Jul-20 N 1.78 13-Oct-20 N 1.71 22-Apr-21 N 1.74 Price Target (RM) 1.665 1.8 1.8 1.75 1.7 Price(RM) 1 0 Aug Nov Feb May Aug Nov Feb May Aug Nov Feb May Aug 18 18 19 19 19 19 20 20 20 20 21 21 21 Source: Bloomberg Finance L.P. and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Oct 16, 2012. All share prices are as of market close on the previous business day. Break in coverage Mar 12, 2020 - Jul 17, 2020. 17 Mervin Song, CFA (65) 6882-7829 mervin.song@jpmorgan.com Asia Pacific Equity Research 19 August 2021 KLCCP Stapled Group (KLCC.KL, KLCCSS MK) Price Chart 13 12 11 10 9 UW RM6.7 OW RM8.8 8 7 Price(RM) 6 5 4 3 2 1 0 Aug Nov Feb May Aug Nov Feb 18 18 19 19 19 19 20 OW RM8.55 OW RM8.95 May Aug Nov 20 20 20 OW RM7.5 Feb May 21 21 Date Rating Price (RM) 09-Nov-18 UW 7.80 31-Jul-19 OW 7.84 18-Jul-20 OW 7.94 13-Oct-20 OW 7.65 22-Apr-21 OW 7.00 Aug 21 Price Target (RM) 6.7 8.8 8.95 8.55 7.5 Source: Bloomberg Finance L.P. and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Nov 21, 2006. All share prices are as of market close on the previous business day. Sunway REIT (SUNW.KL, SREIT MK) Price Chart 3 N RM1.798 2 N RM2 OW RM1.7 OW RM1.8 OW RM1.65 Date Rating Price (RM) 13-Sep-18 N 1.73 31-Jul-19 N 1.89 18-Jul-20 OW 1.58 13-Oct-20 OW 1.52 22-Apr-21 OW 1.51 Price Target (RM) 1.798 2 1.8 1.7 1.65 Price(RM) 1 0 Aug Nov Feb May Aug Nov Feb May Aug Nov Feb May Aug 18 18 19 19 19 19 20 20 20 20 21 21 21 Source: Bloomberg Finance L.P. and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Aug 15, 2010. All share prices are as of market close on the previous business day. Break in coverage Mar 12, 2020 - Jul 17, 2020. The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia and ex-India) and U.K. small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, www.jpmorganmarkets.com. 18 Mervin Song, CFA (65) 6882-7829 mervin.song@jpmorgan.com Asia Pacific Equity Research 19 August 2021 Coverage Universe: Song, Mervin C: Ascendas India Trust (AINT.SI), Ascendas REIT (AEMN.SI), Ascott Residence Trust (ASCO.SI), CDL Hospitality Trusts (CDLT.SI), CapitaLand (CATL.SI), CapitaLand Integrated Commercial Trust (CMLT.SI), City Developments (CTDM.SI), Far East Hospitality Trust (FAEH.SI), IGB REIT (IGRE.KL), KLCCP Stapled Group (KLCC.KL), Mapletree Industrial Trust (MAPI.SI), Mapletree Logistics Trust (MAPL.SI), Sunway REIT (SUNW.KL) J.P. Morgan Equity Research Ratings Distribution, as of July 03, 2021 J.P. Morgan Global Equity Research Coverage* IB clients** JPMS Equity Research Coverage* IB clients** Overweight (buy) 52% 54% 49% 77% Neutral (hold) 37% 48% 39% 69% Underweight (sell) 11% 39% 13% 55% *Please note that the percentages might not add to 100% because of rounding. **Percentage of subject companies within each of the "buy," "hold" and "sell" categories for which J.P. Morgan has provided investment banking services within the previous 12 months. For purposes only of FINRA ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above. This information is current as of the end of the most recent calendar quarter. 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