Highlights

Punitive Budget 2014: (1) RPGT raised to 30%; (2) Minimum price for foreigners raised from RM500k to RM1m; and (3) Developers banned from offering DIBS.

Our take on the Budget:

(1) The hike in RPGT was harsher than we had expected, and harsher than the previous regime (Figure #1). However, we believe impact will be limited for new projects which take three years to completion.

(2) DIBS ban was already mentioned in the media since June, hence the slide in KLPRP index suggests market already partially discounted the risk. We foresee the brunt of the impact to be mainly felt in Greater KL and IDR.

(3) Minimum price raised for foreigners. There will be some impact, but we believe it will be modest given that a large portion of projects targeted to foreigners are already above the RM1m threshold. Again, this has been talked about in the past few months, hence we believe the market has discounted it.

Taking stock. All in all, we remain long-term positive on the property sector given: (1) Market has partially factored in the negative factors – the KL Property Index has already declined 10% from its peak in May (Figure #3); (2) Favourable macro factors such as young demographics, shrinking average household size, and rising income levels (Figure #4-6); and (3) We believe any knee-jerk reaction in the near term presents an opportunity to accumulate, given developers under our coverage are currently trading at 30- 60% discount to RNAV, with the mid cap stocks trading at mid-single digit PER.

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 with the punitive measures 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 - 28 Oct 2013