SP Setia – TRADING SELL

SP Setia – A boost from China (Company Update)

Price: RM4.52
Target Price: RM4.25
Recommendation: TRADING SELL

· China story propels SP Setia (SP) share price to lofty levels, surpassing our fully diluted RNAV of RM4.25 by 6%. We believe share price has been boosted by SP’s potential revenue from the JV development in Hang Zhou China and China’s, positive news flow; the market is anticipating contribution in the near future given China’s economic prowess .

· However, we believe market is over-pricing in the good news as FY10E PER is current trading at 28.8x which is higher than Malaysia’s 2007 property bull run year forward PER of 22.1x. We also like to remind investors that Malaysia will continue to be its main income generator even if the China project starts contribution.
· China JV is a re-rating catalyst, but likely to contribute significantly to earnings post FY10 (assuming that the JV sees fruition). To recap, SP and Hangzhou Ju Shen Construction Engineering Ltd has signed a co-operation agreement to consider the viability of developing 25acs Xinzhong/Xin’an Village, Ningwei Towen, Hangzhou City. Duration of the decision period will last approximately 6 months before the JV is finalized. Based on its Eco Lake, Vietnam experience, we think that a longer gestation period is likely as China is new to SP.

· We believe that investors should start top slicing on the back of the China catalyst. Although we are confident that the China project will pull-through, whilst a strong balance sheet (0.2x net gearing) provides opportunities for more land acquisitions, we remain cautious of stretched valuations of the overall market as a whole. If the China project takes too long too conclude, we may see a reversal in share price performance; this would in fact provide a good opportunity to re-enter at less demanding valuations.

· Downgrading to Trading SELL from BUY. Fair value remains unchanged at RM4.25. At current prices, SP is trading at 28.8x FY10E PER which is a steep premium to its 11x peer averages, 16x market and 11x historical averages. Similar 2.3x PBV is trading at premiums to its 1.1x peer averages and 1.2x historical averages. Short term re-rating catalysts lies with finalization of the China project and more Vietnam projects.