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Morningstar | Malaysian Prime Minister's Comments About Forest City Should Have Little Impact on Country Garden

Mahathir bin Mohamad, the Malaysian prime minister, made a statement on Aug. 27 that the government may alter its “My Second Home” program, which allows foreigners to obtain long-term residency rights in Malaysia by acquiring properties. The comment was directed toward Forest City, a large development project in Johor, where the buyers were rumored to be mostly Chinese citizens. Country Garden, the developer of the project, saw its shares drop by more than 3% on Tuesday. We believe the market overreacted, as the project only accounts for a small portion of the company’s sales and earnings. We maintain our fair value estimate of HKD 14 for Country Garden, along with our no-moat rating.

We believe the market reaction is excessive for several reasons. First, the project’s contribution to Country Garden’s total sales and earnings is very limited. In 2017, the project accounted for CNY 7 billion in sales, compared with the company’s total sales of CNY 550 billion, and we estimate that the impact on valuation is around 1%. Country Garden indicated that the project is self-funding at this point, with all construction expenditures covered by sales proceeds. Second, the project is jointly owned by Country Garden (60%) and Esplanade Danga 88 Sdn Bhd (40%). The latter firm has both KPRJ, a Johor state agency, and Ibrahim Ismail, the Sultan of Johor, as its shareholders. Malaysia is politically organized as a federation. It is doubtful that Mahathir’s off-the-cuff statement can be interpreted as a sales ban that can be legally applied to a single development project in a federal state. Not surprisingly, a government housing minister stated the next day that the matter is undecided at this point, essentially retracting the minister’s statement.