Hatten Land Ltd - CIMB Research 2017-06-20: Building On Melaka’s Transformation

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HATTEN LAND LIMITED PH0.SI

Hatten Land Ltd - Building On Melaka’s Transformation

• Hatten Land is a developer of integrated developments, largely in Melaka.
• It has a large pool of locked-in sales, which we believe underpin its medium-term earnings outlook.
• Melaka property market is likely to benefit from the development of numerous mega projects.
• Strong sponsor (Hatten Group) landbank pipeline to extend forward income visibility, in our view.
• Initiate with Add rating and target price of S$0.38.

Company background 

• Hatten Land (Hatten) is a developer of integrated developments, headquartered in Melaka. The company is led by CEO Mr Colin Tan and Deputy MD Mr Edwin Tan, who both have more than 10 years of experience in this market. 
• Backed by sponsor Hatten Group, Hatten is one of the first developers in Melaka to introduce innovative property products and develop award-winning integrated projects to suit the changing lifestyle needs of consumers.

Large unrecognised sales underpin medium-term earnings outlook 

• The group has four ongoing projects in its initial portfolio and recently acquired three land parcels. 
• Underpinning our projected core net profit (before restructuring expenses) CAGR of 28.5% for FY16-19F are these ongoing development projects (excluding landbank) with a remaining potential GDV of c.RM1.65bn. Of this, RM660m is locked as yet-to-be-recognised presales, which we expect to be largely booked in FY17F-18F.

New infrastructure development to catalyse 

• Melaka market The Melaka property market is the fifth-largest market in Malaysia. We believe there is significant growth potential in this market, which caters to not only the 0.9m domestic population but also more than 16m tourists that visit the city annually. 
• In addition, new infrastructure projects such as the Kuala Lumpur-Singapore High Speed Rail and completion of the Melaka Impressions and Melaka Gateway tourist attractions are likely to draw more visitors and investors to Melaka as a holiday and investment destination.

Additional sponsor landbank to provide long-term income visibility 

• To date, Hatten has exercised its right of first refusal (ROFR) for three land parcels within MOU period with its sponsor. There are two remaining land parcels measuring 74.86 acres. We estimate net debt-to-equity ratio to decline from 2.78x now to below 0.31x by FY6/19F. This puts the group in a strong position to acquire land for growth. 
• In addition, the advantage of buying land from its sponsor would mean timely purchase and rapid asset turn, in our view, translating into higher ROEs over the medium-to-long term.

Initiate with Add rating 

• We initiate with an Add rating and a target price of S$0.38, premised on a 45% discount to RNAV. 
• We like Hatten for its exposure to the growth market of Melaka that is likely to benefit in the medium term from the mega infrastructure projects currently underway.
• Key risks include unfavourable forex translation and changes in local government policies on property market that could negatively affect end-buyer demand for properties.

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Company Background 

• Hatten Land (Hatten) is the largest property developer, by market cap, listed on the SGX Catalist Board. 
• Hatten is one of the niche property developers in Malaysia, specialising in integrated residential, hotel and commercial developments, largely in Melaka. Its sponsor is Hatten Group, which commenced its first development project in 2005 by rebuilding an abandoned project into Melaka’s largest shopping mall – Dataran Palawan Melaka Megamall. Successful completion of this project paved the way for other developments such as Terminal Palawan, including the hospitality, retail and residential properties.

Track record in the Melaka property market 

• Hatten ventured into property development in Melaka in 2005 through the acquisition from Lianbang Ventures Sdn Bhd of an abandoned mall project sitting on a 7.7ha site in the heart of Melaka town. 
• The first phase of Dataran Pahlawan Melaka Megamall was completed in 2006 and the second phase was completed in 2008. To date, this mall remains the largest in Melaka and attracts c.1m shopper footfall per year. This was followed by the development of the Hatten Square project, comprising retail and hospitality properties. This project was completed in 2012. This is a testament to the group’s ability to develop, as well as manage properties. 
• The focus on the differentiated integrated projects has led Hatten Group to win various awards such as “Best Luxury Suite Hotel” in 2014 and 2015 from the World Luxury Hotel Awards. Dataran Pahlawan Melaka Megamall was awarded the “Highly Commended Retail Development Malaysia” and “Highly Commended Retail Architecture Malaysia” at the Asia Pacific Property Awards 2013/14.

Management structure 

• The company is helmed by Dato’ Colin Tan as executive chairman and Managing Director as well as Dato’ Edwin Tan as executive director and Deputy Managing Director. They are the founders of the Hatten group with more than 10 years of experience in the property market. Dato’ Colin’s expertise in in the area of sales and marketing, business growth, development and asset management and land acquisition, while Dato Edwin’s focus is on operations and development management. 
• In addition, there is an experienced management team comprising John Lee (Head of Corporate & Finance), Johnson Chua (Group FC), Chang Foh Siong (Head of Development Management) and Mark Tan (Head of Business Development).

Benefiting From The Transformation of Melaka 

Leading player in the Melaka property market 

• Hatten is one of the largest players in the Melaka property scene. Today, Hatten has a total portfolio of 4.3m sq ft of net saleable area (NSA) in Melaka and a development landbank estimated at 7.93m sq ft gross floor area (GFA) in Melaka and Selangor. Its projects are progressively selling and will likely underpin near-term profit growth, in our view.

Good location in Melaka 

• Hatten’s projects are well located in the heart of Melaka Town with sea-facing views and proximity to tourist attractions. The completed Hatten City P1 is the tallest building in Melaka while Hatten City P2 enjoys beautiful sea-facing views.
• Meanwhile, its landbank pipeline, such as Movie-Town project is facing the Melaka Gateway project. Harbour City is located on Pulau Melaka where part of the Melaka Gateway project is being built and near the new international cruise terminal.

Potential of the Melaka market 

• The Melaka property market has grown steadily since 2010, aided by improving economic performance and increasing investments in the state. Although Melaka accounted for only 2.8% of the total population of Malaysia in 2015, its GDP per capita and median household income were higher than national averages in 2014, while its unemployment rate of 1% was lower than the national level of 3.1% in 2015. This bodes well for the property market in the state. 
• Malaysia is targeting GDP growth of 5-6% p.a. between 2016 and 2020F, while Melaka is targeting economic growth of 5.5% for the same period, to be led by medium-term growth in the services industry, including wholesale, retail trade, accommodation, restaurants and utilities, transport, storage and communication sectors.

Property prices have risen by about 42% between 2010 and 2016, but are still lagging prices in Selangor and Kuala Lumpur. 

• As at 4Q16, there were 172,359 housing units in Melaka, accounting for 3.5% of the total stock in Malaysia.
• Incoming supply is also moderate, amounting to just 3.3% of the total stock as at 4Q16, while unsold inventory makes up only 0.9% of the total stock. This bodes well for the outlook of the Melaka property market, in our view.

New Infrastructure Catalysts 

• The inflow of mega projects and new infrastructure developments, such as Melaka Gateway and Kuala Lumpur-Singapore (KL-Singapore) High Speed rail, are likely to spur the growth of Melaka as well as increase the attractiveness of this location as an investment destination.

KL-Singapore High Speed Rail (HSR) 

• The 350km High Speed Rail is expected to cost RM43bn and is targeted for completion by 2026F. The bilateral agreement between the two countries was signed in Dec 2016, and civil works and tender for the private entity overseeing the train and rail assets are expected in late 2017F. Total travel time from KL to Singapore is anticipated to be 90 mins with the Singapore-Melaka leg expected to be 50 mins, and 40 mins from Melaka to KL. 
• Ayer Keroh has been identified as one of the eight stations along this route. When completed, we expect the shortened travelling time to boost the attractiveness of Melaka as a holiday and investment destination.

Expansion of the Melaka International Airport 

• Melaka International Airport currently enjoys flights from both international and domestic locations, the latest being direct flights operated by China Southern Airline from Guangzhou, which started in Sep 2016. I
• n addition, weekly scheduled flights to and from Guangdong that would be operated by China Southern Airlines may further boost Chinese visitor arrivals, which made up 13% (1.68m) of the total foreign tourist arrivals into Malaysia in 2015. Of this, 53% visited Melaka.

Melaka Gateway 

• The planned RM42bn Melaka Gateway is a premier mixed development project comprising three reclaimed islands and one natural island, totalling 1,366 acres.
• Developed by KAJ Development, the entire project is expected to be completed by 2025F. The development will comprise an international cruise terminal, marina, entertainment and lifestyle, retail and luxurious residential condos (island 1), free trade economic zone (island 2), a deep sea port (island 3) as well as a shipbuilding, ship repair and maritime industrial park. 
• According to media sources, Melaka Gateway is projected to generate an additional 2.5m tourists over the next 12 years. 
• In addition, the Melaka International Cruise Terminal, part of the Melaka Gateway project, is scheduled to be completed in 2017F and around 250 cruise ships are expected to dock at the terminal annually by 2020F. The RM8bn deep sea port component is targeted for completion by 2019F.

More upside prospects for Hatten’s projects 

• Hatten currently has four ongoing projects – Hatten City Phases 1 and 2, Harbour City and Vedro by the River. These projects total 4.34m sq ft, of which about 46% were sold as at Mar 2017. 
• The group has a remaining RM660m of progress billings from these locked-in sales to be recognised in FY17F and FY18F.

Hatten City Phase 1 

• Hatten City Phase 1 is an integrated project comprising four blocks sitting atop a 13-storey shopping complex, together with five levels of carpark podium, two 44-storey service apartment blocks, a 19-storey hotel block, a 16-storey hotel block, and retail, residential and hotel (Doubletree Hilton) components. It sits on a total land area of 7 acres with a remaining land lease tenure of 94 years (expiring 20 Jun 2110F). Construction of this project was completed on 31 Mar 2016. 
• Under the JV agreement, the hotel, 1,567 carpark bays and levels 43 and 44 of Silverscape Residences are the landowners’ entitlement, in lieu of the land cost. These make up 9.6% of the total net saleable area of Hatten City Phase 1 and are equivalent to about RM200m, based on the gross development value (GDV) of Hatten City Phase 1.

Hatten City Phase 2 

• Hatten City Phase 2, also known as Imperio Melaka, is an adjoining project next to Phase 1 and comprises a residential and commercial component with a 7- storey retail mall, two blocks of serviced residences and a 7-storey carpark with 1,412 lots. The development is currently under construction with an expected completion date in 2H17F. 
• Under the JV agreement, all the parcels on the ground floor and mezzanine floor of the Imperio Mall, Cabana on level 13, penthouse units at levels 26 and 28 of Imperio Residences and 544 carparks on levels 6-8 belong to the landowners. These represent 9.8% of the total saleable area of Hatten City Phase 2 and are equivalent to RM111.1m based on the estimated GDV of the project.

Vedro by the River 

• Vedro by the River is a boutique retail development along the Melaka River. It comprises a 3-storey retail podium, one level of retail basement and two basement carparks with 128 bays. The development is expected to be completed by 2017F. 
• Under the JV agreement, 6595.1 sq ft of Vedro’s ground floor belongs to the landowners.

Harbour City 

• Harbour City is located on a 6-acre site on Pulau Melaka with a remaining land lease of 94 years (expiring 28 Sep 2110F). It is an integrated commercial development comprising a 5-storey commercial retail mall with one level of lower ground, 8-storey serviced suites together with six storeys of elevated carpark podium with 2,436 slots. There is a 5-storey indoor and outdoor theme park, one level of facilities floor and two 12-storey serviced suites blocks. The project is scheduled to be completed in 2019. 
• Harbour City is located on Pulau Melaka, where the mega Melaka Gateway development is being built. We believe the attractiveness of Harbour City will gain momentum as the development of Melaka Gateway gathers momentum.

New acquisitions bolster forward income visibility 

• Hatten recently acquired three land parcels through its MOU pipeline from its sponsor Hatten Group. We estimate the additional 7.9m sq ft of GFA could effectively double its initial portfolio GFA and boost potential GDV by another RM2.3bn when fully completed and sold. 
• Contributions from these projects have not been factored into our profit estimates.

Thea Wellness project 

• We expect Thea Wellness, the group’s first venture into the wellness industry, to be launched in 2H17F. The project comprises a hotel block and a serviced apartment block. Located in Taman Melaka Raya, we estimate the 2.05-acre site would have a GDV of RM300m when fully sold. The project is slated for completion by 2020F.

MICC project 

• The MICC site is to be developed into an integrated mixed development that will comprise a shopping mall, cineplex, convention hall, auditorium, meeting rooms, hotel and serviced apartments. The site spreads over 9.34 acres of land area in the Melaka Tengah area and we estimate it will have a GDV of RM942m when completed.

Cyberjaya project 

• The Cyberjaya project is slated to be developed in three phases into an integrated mixed development comprising retail, commercial (offices), residential, hospitality and a hospital. This will be the group’s first venture into medical tourism. The project spans 25.55 acres of freehold land in Cyberjaya and we expect it to have a GDV of RM3bn when completed.

SWOT analysis 

Strengths: 

• In our opinion, Hatten’s strength lies in its strong brand positioning in Melaka with a dominant market share. This is in addition to the good quality and strategic locations of its projects. 
• Backed by an experienced management team and a supportive sponsor, the group has developed a good track record for its projects in Melaka. In addition, a ready development landbank would mean a short ‘time-to-market’ for its projects, in our view.

Weaknesses: 

• We believe Hatten’s activities are limited by its small balance sheet and high gearing. This may constrain Hatten’s ability to take on development opportunities that may arise in the next few years.

Opportunities: 

• We believe there are opportunities in the Melaka property market, given the numerous investment and infrastructure projects that have been identified, such as KL-Singapore High Speed Rail, Melaka Gateway and the expansion of the sea port and airport. This would raise Melaka’s profile as an investment destination and potentially attract more domestic and investment buyers into the property market.

Threats: 

• Given that the group’s exposure is almost entirely confined to the Melaka market, we believe any change in the socio-political environment in Melaka is a key risk faced by Hatten.

Business Strategies and Operations 

Continued focus on developing integrated projects 

• The group intends to continue to leverage on its expertise in mixed development projects with prominent lifestyle features at accessible locations with developed amenities. This would enable the group to cater to the changing needs of customers and innovate on design. 
• We believe this would allow the group to compete effectively in the market place.

Exploring opportunities to expand through M&As, JVs and strategic alliances 

• In addition to outright land acquisitions, the group could also consider expansion via mergers and acquisitions, JVs or strategic alliances to strengthen its market position or expand into new complementary business areas.

Expansion into the region 

• In the longer run, the group could look to expand its business in mixed developments and leverage on its established base in Melaka to expand into other markets in the Southeast Asian region. This would enable it to collaborate with other developers on prominent projects for longer-term earnings growth.

Financials 

• We project core net profit (excluding exceptional items) CAGR of 28.5% for FY16-19F. This is underpinned by RM660m of unbilled sales at end-Mar 17 from ongoing projects, largely from Hatten P1 and P2.
• We project Hatten to incur net loss of RM11.8m in FY17F, before earnings pick up in FY18F-19F due to a one-off listing and reverse takeover (RTO) expense of RM87.8m. The construction of Hatten City Phase 1 was completed in FY16 and Hatten City Phase 2 is scheduled for completion in FY17F. We anticipate that these projects will continue to see good take-up rates post-completion.
• As a result of the fund raising and higher profitability, we project that net debtto-equity ratio will decline from 278% at end-FY15 to 31% by end-FY19F. This would put the group in a strong position to reinvest for future earnings growth, in our view.
• The group’s dividend payout ratio policy is 10% of core net profit. Assuming this payout ratio, we estimate DPS of 0.4-1.1sen for FY17F-19F. This translates into FY17F-19F dividend yields of 0.6-1.8%, based on the current share price.

Valuation and Recommendation 

• We evaluate Hatten based on the RNAV of its current property portfolio and include the net present value (NPV) of the surplus from the remaining MOU assets. Hatten is currently trading at a 73% discount to its RNAV of S$0.69. 
• Our target price of S$0.38 assumes a 45% discount to RNAV, taking into account Hatten’s smaller market cap and the Singapore developers’ average discount of 31%.
• Key catalysts include the faster-than-expected completion of the KL-Singapore High Speed Rail and Melaka Gateway, as well as Hatten’s other ongoing projects. 
• Key risks include forex volatility, which could lead to translation risks, as well as unfavourable changes in local and property market policies that could negatively affect end-buyers’ demand.

Risks 

• Forex translation volatility is the key risk to our view, as Hatten reports its financial statements in RM but its share price is in S$.
• Regulatory risk is also a concern as Hatten’s operations are largely located in Melaka. Any changes in state policies on land matters and changes in nationwide property policies could have adverse impact on its business.

LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2017-06-20

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