Investment Highlights

• We reiterate our NEUTRAL stance on the property sector. We are cautious on the sector due to: (1) slower 2H2021 recovery as tighter containment measures (from June onwards) led to the closure of sales galleries and halted property construction activities, delaying the recognition of progress billings; (2) banks remaining cautious in residential property lending, reflected in the low approval rate of 36% compared to 51%–53% during the 2011–2014 uptrend (Exhibit 3); and (3) persistently subdued consumer sentiments and employment prospects against a backdrop of the prolonged pandemic, which are restraining consumers from committing to the purchase of big-ticket items, particularly, a house.

• Improving YoY but mixed QoQ. Out of the 6 companies under our coverage, 1 exceeded our expectation, 3 were in line while 2 companies came in below our forecasts. Except for UEM Sunrise which registered a sharp 86% YoY drop in core loss, most of the developers have successfully shown more than 30% increase in their bottom line from the low base in 1HCY20 despite prolonged movement control orders (MCOs) (Exhibit 2).
  • The outperformer, IOI Properties Group (IOIPG) registered better-than-expected FY21 earnings, underpinned by higher progress recognition together with stronger sales in Malaysia (61%) and China (38%) exceeding management’s initial sales target by 28%.
  • The core net profit of Sunway, S P Setia (Setia) and Sime Darby Property (SimeProp) came in within expectations. Both Setia and SimeProp returned to the black in the 1HCY21, driven by higher revenue in property development and property investment. Meanwhile, Sunway’s property segment continued to be supported by its international portfolio, particularly in Singapore which accounted for 61% of the group’s 1HFY21 total sales, coupled with higher progress billings from local construction projects and stronger recovery in hospital activities.
  • Both Mah Sing and UEM Sunrise (UEMS) fell short of our forecasts. Mah Sing was weighed down by :1) higherthan-expected pre-operating costs for its glove business; and 2) weaker-than-expected hotel contributions while UEMS was dampened by slower construction progress/billings and higher-than-expected finance costs.
  • QoQ, IOIPG, Sunway and Mah Sing posted stronger 2QFY21 earnings growth. However, Setia declined by 31% QoQ from weaker contributions in construction and investment properties while SimeProp dropped 66% QoQ from slower progress billings in property development. The worst performer, UEMS, incurred a wider loss as intensified lockdowns badly impacted all segments except for its overseas property development.
• Sales momentum intact. New sales achieved in the 1H2021 rose substantially by 2.3x YoY to RM8.6bil from a low base in 1H2020. Except for IOIPG which exceeded its full-year FY21 sales target, most of the companies attained 50%–75% of their FY21F sales target vs. 13%–51% in the previous year. Despite a full lockdown in June, QoQ sales were still sustainable, thanks to the ongoing Home Ownership Campaign (HOC) (which accounted for more than 48% of local sales), digital marketing initiatives and successful new launches (Exhibit 5).
• Improving construction progress. Based on the latest updates from developers, property construction activities have now resumed with a 60% workforce limitation of pre-pandemic capacity. We believe that the improving operations will continue to be supported by the companies’ rising vaccination rates in which at least 80% of their employees have been vaccinated with a single dose and 10% having completed their vaccination.
• Dampened interest from stricter Malaysia My Second Home (MM2H) programme. Suspended in August 2020, the programme is now set to resume in October 2021 with stricter terms and conditions, particularly in financial requirements (Exhibit 5). In line with most of industry experts’ views, we reckon this to be negative for the sector given that the financial thresholds have surged by more than 200% for applicants who are below and above 50 years old. Nevertheless, as foreigners are only allowed to purchase properties with selling prices of over RM1mil in most cases, we expect a slight impact to sales as the contribution from foreign buyers to the developers under our coverage was minimal at only 1%–5% during the pandemic vs. 10% before the pandemic. Thus, we make no changes on our forecasts for now.
• Our top pick for the sector is Sunway (fair value RM2.20) given the strong brand recognition established by its highly successful landmark developments and expanding healthcare business, supported by substantive unbilled sales and outstanding order book.

Source: AmInvest Research - 6 Sept 2021