Highlights

Kwasa Land, the master developer of 2,330 acres in Sungai Buloh, has submitted the masterplan to the State Government, and expected GDV of RM50bn over 20 years, to eventually contain 28,000 homes for 150,000 people.

Over 150 developers have applied for the pre-qualification exercise, but only 60 developers will be selected. Tenders for Phase 1 will be called in Feb 2014.

The first parcel of 64 acres will be developed by Tier 1 developers with with a paid up share capital or shareholders’ fund of at least RM1bn. The town centre will be 70% commercial and 30% commercial, with two MRT stations within its confines.

Meanwhile, Tier 2 developers (paid up capital or shareholders’ fund of at least RM300m) and Tier 3 developers (Bumiputera companies with a paid up capital or shareholders fund of RM1m and above) will tender for residential developments of circa 10 – 20 acres each.

Kwasa Land is projecting land sales revenue of approximately RM11bn for 1,350 acres to public limited companies, government-linked companies, private developers as well as Bumiputera developers. In addition, Kwasa Land is likely to invest in equity participation in most of the precinct areas to generate greater returns and to ensure conformance of the urban design guidelines.

While this will be long-term positive for the sector with bigname developers such as UEMS, SP Setia, Sunway and Mah Sing being the potential beneficiaries, we believe near term impact will be limited, as 1H will still be muted by the numerous and recent cooling measures. We expect the sector to stage a recovery in 2H, and keep our neutral weighting for now.

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

IOI Properties (BUY, TP RM4.01): We are bullish on IOIP as we believe there is good upside from its exposure to Singapore and China given that the listing is at or near the bottom of the cycle, in addition to its strong margins of circa 60%. Its low net gearing of less than 5% means it will be highly resilient to any slowdown in the property cycle.

Source: Hong Leong Investment Bank Research - 16 Jan 2014