SP Setia - Challenging maiden venture into China HOLD

- It was announced yesterday that S P Setia and Rimbunan Hijau –  via Quinzhou Development Consortium – has entered into a joint-venture framework agreement (JVA) with Quinzhou Jingu Investment to establish a JVCo for the development  of the Qinzhou Industrial Park (QIP).

- The JVA basically provides a framework for the development of the China-Malaysia QIP on a land measuring approximately 55 sq km (or 13,591 acres) in total, located next to the Guangxi Qinzhou Bonded Port Area. 

- The QIP will comprise five functional districts, namely industrial, residential, supporting facilities service, port new city production central, life central, and scientific and technology research service.

- A JVCo with a capital of RMB1.8bil (or RM878mil) –  China Malaysia Qinzhou Industrial Park Investment Co ltd  – will be established, which will see Qinzhou Jingu and Qinzhou Malaysia having a 51% and 49% stake, respectively. 

- Meanwhile, SP Setia and Rimbunan Hijau will have a 45% stake each in Qinzhou Malaysia, while the remaining 10% will be shared equally between Malaysian businessmen. This means SP Setia will have a 22.1% effective stake in the development, for which it will commit an initial capital of RM194mil.

- The industrial park is located some 2 hours’ drive from Nanning, capital city of Guangxi or 10km south of Qinzhou City and 5km north of the Guangxi Qinzhou Free Trade Port Area (“Qinzhou Port”) – a national economic and technological development zone. It is also strategically located between the port cities of Beihai to the east and Fangchenggang City to the west. The latter is a major regional shipping and trade hub between Guangxi and Vietnam.

- We understand the immediate development focus of the QIP is within the start-up district, which spans over 1,945 acres, although the GDV of this portion is not known at this juncture. S P Setia expects the maiden development to start in 4Q2012 as the investment certificate would be issued in 3 to  4 months’ time.

- We do not believe the market will re-rate the stock due to this news until material earnings contributions start to kick in, which we think will be in the long term. However, on the plus side, given it is a G2G initiative, it would enable SP Setia to secure development approvals without much hassle, unlike its previous China development in Xiaoshan, Hangzhou. 

- We are keeping our earnings estimates at this juncture, given that it is beyond our forecast horizon and details  are rather sketchy at this juncture as the parties are still doing the feasibility studies. We maintain our HOLD rating. 

Source: AmeSecurities