Reiterate buy at RM3.90 with target price of RM4.33: SunCity moved a step closer to securing its second project in China following a collaboration agreement with Sino-Singapore Tianjin Eco-City Investment and Development Co, Ltd (SSTEC) for the joint development of 102.3 acres (41.4ha) land in Tianjin, China, which forms part of the 7,500 acres Sino-Singapore Tianjin Eco-City project. The company has previously entered into a memorandum of understanding with SSTEC in October 2009.

The project is strategically located in the fast-growing Tianjin Binhai New Area and is well-positioned to be the focal point for the acceleration of growth in the Bohai Rim region. Over the next two decades, this project will be transformed into an urban city with 110,000 homes for about 350,000 people.

The mixed residential and commercial project will have an estimated gross development value (GDV) of 10 billion yuan or RM4.7 billion, double that of earlier estimate of five billion yuan. The project, which comprises more than 5,000 units, will be developed over five years and is expected to commence in March 2011 at the earliest.

This project is even bigger than Sunway South Quay project and is poised to be SunCity’s largest project. It will boost its remaining GDV from approximately RM15 billion to RM20 billion. The project will also position SunCity to be the Malaysian developer with the largest exposure to the China property market.

We are not making any revision to earnings at this juncture as the joint venture is still subject to the approval of the Tianjin local government. Upon procurement of the authority’s approval, SSTEC and SunCity will enter into joint-venture agreement. While no details have been revealed on the equity investment and profit sharing at this juncture, we understand that SunCity will have a majority stake in the JV.

We maintain our buy call as we like SunCity for its undemanding 10.4 times price/earnings (P/E) and 32% discount to revised net asset value (RNAV) of RM5.77. Our unchanged target price of RM4.33 is based on 12 times P/E on FY10 earnings per share (EPS).

With increasing sales momentum and landbank acquisitions, SunCity’s valuation is compelling as our target price implies price-to-earnings growth (PEG) multiple of 0.7 time only. Furthermore, its impending REIT listing later this year will unlock the value of its investment properties, which will be a catalyst to narrow its valuation gap to its RNAV.