PUBLIC INVESTMENT BANK

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1 PublicInvest Research Sector Update Friday, July 14, 2017 KDN PP17686/03/2013(032117) Property Neutral FBM PROPERTY INDEX (m) Volume (m) KLPRP Index Jul-16 Aug-16 Oct-16 Nov-16 Dec-16 Feb-17 Mar-17 May-17 Jun-17 SECTOR PERFORMANCE Absolute Returns Relative Returns RECOMMENDATION TABLE Current (RM) 1M 3M 6M Target (RM) Upside (%) 1,350 1,300 1,250 1,200 1,150 1,100 1,050 1,000 Call UEMS OP SP Setia OP E&O N MK Land IGB N N I-Bhd OP LBS OP Tan Siang Hing T F E tan.sianghing@publicinvestbank.com.my Lacking Catalysts Granted, share price for most of the property developers have moved up this year, but which we believe is due to renewed buying interest in laggards and overall improved market risk appetite rather than on signs of recovery in operating conditions. We are still of the view that the property market will remain challenging in 2017 due to the difficult trading environment currently, driven by weak sentiment, low affordability, stricter bank lending and rising incoming supply. The sector is also faced with high property prices (and high household debt) and oversupply in certain segments-such as high-end condominiums especially in Iskandar. All told, we maintain our Neutral call on the sector. We believe property prices will still hold up well however, supported by ample liquidity, high input costs (due to compliance/land costs), the low interest rate environment and strong secular positives (young demographics and improved connectivity from MRT/LRT/HSR spending). Flat demand growth expected. Property sales have continued to soften, with the impact of cooling measures and oversupply concerns in certain markets (mainly Iskandar Johor) weighing. Property developers have mostly set flat sales targets for 2017, which signals that property sales are expected to stay moderate at best. Also, we see heightened competition especially in the affordable housing segment with the raised household income eligibility to RM15,000 per month and reduced moratorium of five years by the government. This, we believe, could further squeeze margins in the crowded affordable housing market. Affordability concerns. High property prices seem to be a new norm especially in developed countries which are still recording new highs despite cooling measures introduced which have successfully reduced transactions. In normal circumstances, property prices should ease but in certain markets, property prices are still stubbornly hovering at elevated levels. Cooling measures in Malaysia appear to have successfully slowed down the property price increase somewhat. The house price index, as a whole, contracted marginally by 0.7% in Dec That said, property prices in Malaysia are still considered unaffordable based on recent studies with the median house prices already more than 5.5x annual household income (KL: c.7x for residential properties) as compared to 3x, which is considered the affordable range. Weak consumer sentiment. Consumer sentiment is still weak, with most becoming more concerned about the economy, increasing food prices and political stability according to latest Nielsen survey. Household debt levels are still high (albeit easing marginally from 89% of GDP in 2015 to 86.7% in 1Q17). All in, we believe growth from credit expansion is unlikely in the near term. Stock picks. Our sector picks are selected property stocks such as SP Setia, UEM Sunrise and LBS Bina which have healthy unbilled sales, exposure in growth areas and well-located landbank (especially for SP Setia, which is expected to grow even bigger with the proposed merger with I&P). As for UEM Sunrise, the trading environment in Johor is still tough but we believe the Group will be able to regain its sales momentum, given its well-located landbank in Klang Valley and Iskandar, Johor. LBS is preferred for its strong exposure to the mid-market segment. 1 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 1 of 8

2 Cooling measures have worked their intended purpose Cooling measures affecting property demand. Property transactions resumed its downward trajectory in 2015, with sentiment continuing to be bogged down by the implementation of the Goods and Services Tax (GST) which came into effect April We reckon weak demand could persist, given the high projected incoming supply and also the cautious sentiment in view of high property prices (despite the drop in transaction) and stricter lending by banks. That said, the house price index has been holding relatively well. The house price index, as a whole, eased marginally by 0.7% in Dec High rise properties on average dropped c.2% QoQ in Dec 2016 while landed (i.e. terraced house) house price index was lower by c.3% QoQ. Figure 1: House Price Index (High-Rise & Terraced House) Figure 2: House Price Index (Terraced House) Figure 3: House Price Index (High Rise) Affordability still a concern Affordability is still a concern as property prices are still at elevated levels, despite the pace having slowed down in recent years. To recap, median house prices were 4.4x median annual household income in 2014, which is categorized as seriously unaffordable in the housing market according to global standards (an affordable market should have a median multiple of 3.0x). Certain areas have even higher median multiples such as Kuala Lumpur (5.4x) and Penang (5.2x). 2 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 2 of 8

3 Lingering weak sentiment Weak sentiment. Demand is still soft, and we believe that the trading environment is likely to be difficult in the near term. The demand is expected to be capped by the huge incoming supply, high household debt (at c.86.7% of GDP in 1Q17) and concerns about the high property prices, albeit recent weakness in price appreciation last year. That said, genuine demand from first-time homebuyers remains healthy, driven by growing economy of c.4.8% for 2017 and unemployment rate at c.3.5%. Figure 4 : Consumer Sentiment Index Source: MIER Sector headwinds Difficult operating environment. Near term, we believe that the operating environment to remain difficult with developers getting more aggressive in marketing especially in offering financing schemes to help homebuyers to bridge the financing gap between purchase price and purchaser s end financing loan amount. With the overall property transactions falling for the second year in a row (-12.6% YoY in 2016 and -7.7% in 2015), sales are unlikely to see recovery in the near term, as bank lending is still relatively strict. We understand that many developers are still facing difficulties in converting their initial high bookings into sales due to financing-related issues. The recent approval rate is still at c.40% levels. That said, loan approvals appear to be on recovery mode YTD, which we believe could be due to pentup demand from genuine homebuyers but likely for affordable housing of which the listed developers under our coverage have limited exposure. Figure 5: Residential Transactions (Units) Primary Secondary Total Primary Secondary Total YOY(%) YOY(%) YOY(%) , , , , , ,317 (31.4) 5.6 (2.3) , , , , , ,067 (3.9) (5.5) (5.3) , , ,775 (1.5) , , , , , ,985 (23.8) , , ,161 (31.8) (1.1) (4.9) , , , , , , , , , (0.4) , , ,628 (32.8) (10.7) (13.7) , , , , , ,494 (20.9) (5.7) (7.7) , , ,765 (18.8) (11.8) (12.6) 3 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 3 of 8

4 01/ / / / / / / / / / / / / / / / / /2017 PUBLIC INVESTMENT BANK Figure 6 : Loan Approvals (Residential) 14, Loan Approvals (Residential) YoY (%) 12, , , , , , % 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% Figure 7: Loan Approval Rates (Residential) Buyer s market Incoming supply. Incoming supply is still expected to weigh down sentiment, with completion expected to increase this year. With c.830,000 residential units expected to be coming into the market in the next 2 to 4 years, property prices are expected to stay weak in what we believe to remain a buyer s market. Property purchasers will be selective in view of the weak sentiment despite the aggressive marketing schemes offered by developers, which among others includes freebies (free vacation, lucky draws, etc) and generous discounts that are typically around 10%-15% to the listed selling price. 4 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 4 of 8

5 Crowded market in affordable range. We also notice the increasing trend of the federal government pushing for more supply of affordable housing especially under the 1Malaysia People s Housing Programme (PR1MA). The monthly income cap to purchase PR1MA houses has recently been increased from RM10,000 to RM15,000 while the moratorium has been cut to five years from ten years previously. Hence, we believe competition will be stiff in the affordable housing segment as more middle-income households are now eligible to purchase these houses that priced between RM100,000 and RM400,000. Also, we understand that the government has also come out with a special end-financing scheme named Skim Pembiayaan Fleksibel (SPEF) which is created exclusively for PR1MA buyers in collaboration with Bank Negara Malaysia, the Employees Provident Fund and four local banks, namely Maybank, CIMB, RHB Bank and AmBank. SPEF allows borrowers to only service their interest in the first five years, with the principal amount only kicking-in from year six onwards. Figure 8 : Housing stock Incoming Supply Completion Existing Stock 12/ ,778 69,585 2,528,049 12/ , ,014 2,800,874 12/ , ,524 2,991,738 12/ , ,490 3,252,805 12/ , ,964 3,461,725 12/ , ,600 3,653,279 12/ , ,448 3,852,049 12/ , ,123 4,043,040 12/ , ,334 4,193,150 12/ , ,335 4,325,650 12/ ,760 99,866 4,435,736 12/ ,121 65,866 4,512,665 12/ ,363 73,788 4,631,607 12/ ,475 81,639 4,725,109 12/ , ,747 4,848,030 12/ ,099 80,850 4,928,883 12/ ,687 78,216 4,945,140 Flattish sales target. While we are wary on the challenging conditions, property developers are still targeting new sales averaging about RM1-2bn to as high as RM4bn which we believe is still a healthy replenishment rate. In addition, healthy sales chalked up in recent years have also bumped up unbilled sales of developers, with some having accumulated unbilled sales that are enough to underpin earnings for the next 2-3 years. That said, we believe the property market will remain soft in 2017 due to weak sentiment, low affordability and ample incoming supply. That said, we do not believe there will be drastic price corrections in the offing and recent property price weakness is a healthy correction from the cooling measures in place currently. Figure 9: Property Sales Target FY15A FY16A FY17 SP Setia 4,320 3,823 4,000 Eco World 3,017 3,820 4,000 Mah Sing 2,300 1,781 1,800 UEM Sunrise 2,357 1,369 1,200 E&O 940 1, I-Berhad LBS 1,029 1,238 1,500 Source: Company, PublicInvest Research 5 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 5 of 8

6 But property prices are expected to hold. Notwithstanding the challenges, we still of the view that property prices should be holding well, supported by price inflation of input costs and high land prices. Construction costs have doubled from 2003 to Also, we understand that land conversion and compliance costs have also increased substantially, with total contributions and compliance costs having risen to as high as 25% of the total gross development value for a landed and mixed development while conversion premium has gone as high as 300%. Figure 10: Construction Costs Source: JUBM, Langdon Seah Valuations And Stock Picks High expectations baked-in. While we expect property sales to remain weak in the near term, property stocks i.e. KLPRP Index has performed well YTD, with the index gaining c.14%, outperforming FBM KLCI by c.7%. As such, the sector is now trading at c.0.8x price-book value, or at its long term sector average. Our sector picks are selected property stocks such as SP Setia, UEM Sunrise and LBS Bina which have healthy unbilled sales, exposure in growth areas and well-located landbank (especially for SP Setia, which is expected to grow even bigger with the proposed merger with I&P). As for UEM Sunrise, the trading environment in Johor is still tough but we believe the Group will be able to regain its sales momentum, given its well-located landbank in Klang Valley and Iskandar, Johor. LBS is preferred for its strong exposure to the mid-market segment. As for IGB, we have downgraded IGB Corporation from Outperform to Neutral recently as we believe the upside is capped by the proposed merger with Goldis. IGB s earnings resilience is evident as more than 70% of its earnings are from rental from the Group s investment grade assets. Also, we believe re-rating will come with the incoming assets pipeline to double its earnings in 3-5 years. 6 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 6 of 8

7 Figure 11: KL Property Index YTD Performance Source: Bloomberg Figure 12: KL Property Price to Book Value Source: Bloomberg 7 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 7 of 8

8 RATING CLASSIFICATION STOCKS OUTPERFORM NEUTRAL UNDERPERFORM TRADING BUY TRADING SELL NOT RATED The stock return is expected to exceed a relevant benchmark s total of 10% or higher over the next 12months. The stock return is expected to be within +/- 10% of a relevant benchmark s return over the next 12 months. The stock return is expected to be below a relevant benchmark s return by -10% over the next 12 months. The stock return is expected to exceed a relevant benchmark s return by 5% or higher over the next 3 months but the underlying fundamentals are not strong enough to warrant an Outperform call. The stock return is expected to be below a relevant benchmark s return by -5% or more over the next 3 months. The stock is not within regular research coverage. SECTOR OVERWEIGHT NEUTRAL UNDERWEIGHT The sector is expected to outperform a relevant benchmark over the next 12 months. The sector is expected to perform in line with a relevant benchmark over the next 12 months. The sector is expected to underperform a relevant benchmark over the next 12 months. DISCLAIMER This document has been prepared solely for information and private circulation only. It is for distribution under such circumstances as may be permitted by applicable law. The information contained herein is prepared from data and sources believed to be reliable at the time of issue of this document. The views/opinions expressed herein are subject to change without notice and solely reflects the personal views of the analyst(s) acting in his/her capacity as employee of Public Investment Bank Berhad ( PIVB ). PIVB does not make any guarantee, representations or warranty neither expressed or implied nor accepts any responsibility or liability as to its fairness liability adequacy, completeness or correctness of any such information and opinion contained herein. No reliance upon such statement or usage by the addressee/anyone shall give rise to any claim/liability for loss of damage against PIVB, Public Bank Berhad, its affiliates and related companies, directors, officers, connected persons/employees, associates or agents. This document is not and should not be construed or considered as an offer, recommendation, invitation or a solicitation of an offer to purchase or subscribe or sell any securities, related investments or financial instruments. Any recommendation in this document does not have regards to the specific investment objectives, financial situation, risk profile and particular needs of any specific persons who receive it. We encourage the addressee of this document to independently evaluate the merits of the information contained herein, consider their own investment objectives, financial situation, particular needs, risks and legal profiles, seek the advice of their, amongst others, tax, accounting, legal, business professionals and financial advisers before participating in any transaction in respect of any of the securities of the company(ies) covered in this document. PIVB, Public Bank Berhad, our affiliates and related companies, directors, officers, connected persons/employees, associates or agents may own or have positions in the securities of the company(ies) covered in this document or any securities related thereto and may from time to time add or dispose of, or may be materially interested in, any such securities. Further PIVB, Public Bank Berhad, our affiliates and related companies, associates or agents do and/or seek to do business with the company(ies) covered in this document and may from time to time act as market maker or have assumed an underwriting commitment in the securities of such company(ies), may sell them or buy them from customers on a principal basis, may have or intend to accommodate credit facilities or other banking services and may also perform or seek to perform investment banking, advisory or underwriting services for or relating to such company(ies) as well as solicit such investment advisory or other services from any entity mentioned in this document. The analyst(s) and associate analyst(s) principally responsible for the preparation of this document may participate in the solicitation of businesses described aforesaid and would receive compensation based upon various factors, including the quality of research, investor client feedback, stock pickings and performance of his/her recommendation and competitive factors. Hence, the addressee or any persons reviewing this document should be aware of the foregoing, amongst others, may give rise to real or potential conflicts of interest. Published and printed by: PUBLIC INVESTMENT BANK BERHAD (20027-W) 9 th Floor, Bangunan Public Bank 6, Jalan Sultan Sulaiman Kuala Lumpur T F Dealing Line Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 8 of 8