Highlights

We previously discussed how sector headwinds put a cap on performance of KLPRP index

Sentiment was dampened by cooling measures. The government has been sending strong hints of: (1) Another possible round of RPGT hike, given the ineffectiveness of previous hikes (Figure #1 and 2); and (2) Raising the minimum property price for foreigners in certain areas to RM1.0m, from the current RM500k, albeit not on a blanket basis. (3) Raising stamp duty to 5-10%.

Budget blues. Since our report dated Sep 9th, the KLPRP index still remains 12% off its peak of 1,776 pts (Figure #3). The index is now trending sideways, a sign that sentiment is now turning to cautious optimism ahead of Budget 2014.

Potential re-rating, post-Budget. We believe the sector is set to re-rate in the event of a friendly or not-too-punitive Budget, given our positive sector view over the longer term, as the sector remains underpinned by healthy fundamentals, which include: (1) Young population demographic, with the 25-50 years old making up close to 40% of Malaysia’s total population (Figure #4); (2) Shrinking average household size drives demand for more residential units (Figure #5); (3) Rising income levels to support house prices (Figure #6); (4) Asset quality continues to improve (Figure #7).

Our suggestion: Focus on landed township developers such as Matrix (Buy, TP: RM3.40) and Glomac (Hold, TP: RM1.16) which cater to owner-occupiers and are not reliant on DIBS, which will offer more resilience in terms of sales even if punitive measures are tabled in Budget 2014.

Catalysts

Infrastructure related catalysts; inflation hedging virtues of property; sustainable demand; high affordability ratio; declining NPL ratio for property loans.

Risks

Rising NPL ratios and loss of holding power; margin erosion due to raw material price spikes and/or lower selling prices; slowdown in sales / cut back in launches.

Rating

NEUTRAL

Positives: Asset reflation theme remains intact over the longer term; increased opportunities within the affordable/mass market segment.

Negatives: Slowdown in demand for mid/high end segment and economic growth; tighter lending polices by banks.

Top Picks

Matrix: Share price continues to perform well, thanks to strong optimism over its township earnings and high DY (10% for FY13, with balance 6.2% DY unpaid).

Source: Hong Leong Investment Bank Research - 22 Oct 2013