Highlights

The KLPRP index has significantly underperformed the KLCI index following the government’s measures to curb speculation in Budget 2014, including: (1) RPGT raised to 30%; (2) Minimum price for foreigners raised from RM500k to RM1m; and (3) Developers banned from offering DIBS (Bank Negara has banned it as well).

On the ground, our surveys suggest that take up remains resilient, with projects such as Paloma by Tropicana achieving 60% sales within a month of launch. Interest remains strong in Penang with land reclamation projects on the island and a spate of land acquisitions on the mainland. We expect Johor to take a somewhat longer time to recover.

While 1H is expected to be lacklustre, we anticipate a recovery in 2H 2014, with property sales to be underpinned by the following long term positive factors:

(1) Expectations of inflation – electricity tariff hike, toll rate hike, petrol price hikes. The Malaysian public will continue to rely on property as a natural hedge against inflation (Figure #3); (2) Favourable macro factors such as young demographics, shrinking average household size, and rising income levels (Figure #4-6); and (3) Long term decline in supply growth in Malaysia, owing to scarcity of development land (Figure #8).

We believe the current weakness in share price 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.

All in all, we believe the sector will stage a recovery in 2H, and keep our neutral weighting for now.

Our suggestion: Focus on landed township developers such as Matrix (Buy, TP: RM4.51) 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 (6.8% for FY14).

Source: Hong Leong Investment Bank Research - 3 Jan 2014