Highlights

A study in contrasts. Our research finds that the Malaysian property market has many contrasting features: (1) A favourable long term demand picture, vs. the near-term challenges of high prices and subdued transactional activities; (2) Bright spots such as Penang and Southern KL are doing well, but other areas continue to face challenges.

Long-term demand remains healthy. On a macro level, the long-term picture for demand remains encouraging. Our studies indicate that the combined effects of our young demographics and urbanisation trend will help lead to stronger household formation and healthy absorption of future incoming supply over the mid to long term.

Supply situation: mixed bag. The housing data suggests that supply situation is stable in greater KL but Johor could be an area of concern, as the already huge spike in new planned supply could be further exacerbated by the entry of Chinese developers (Figure #10). Penang mainland continues to be a growth corridor and the new supply should continue to see strong uptake.

Near term: outlook still challenging. While we believe the long term demand remains resilient due to favourable demographics, we see near term challenges of rising house prices and lower transaction activity still persisting.

Finding the outperformers. We believe that the current situation of high house prices and subdued activity indicates house buyers are being highly selective, and are focusing on pricing and location. We re-iterate our view that landed township developers focused on the mass market segment in growth areas will be the outperformers.

Catalysts

Infrastructure related catalysts; inflation hedging virtues of property; sustainable demand from favourable demographics; high affordability ratio.

Risks

Rising NPL ratios and loss of holding power; margin erosion due to raw material price spikes and/or lower selling prices.

Rating

NEUTRAL

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

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

Top Picks

Tambun Indah (BUY, TP RM2.55) - Offers the purest exposure to Penang mainland. We have recently upgraded our RNAV and TP as our findings suggests it has scope to raise selling prices given that similar projects nearby are selling at 20-40% premium.

Matrix Concepts (BUY, TP RM4.51) - Share price continues to perform well, thanks to strong optimism over its township earnings and high DY (6.8% for FY14).

IOIPG (BUY, TP RM3.78) - Our top big-cap pick; rich in landbank in hotspots such as Southern KL (Puchong, Bangi) and outskirts of Johor with low land costs.

Source: Hong Leong Investment Bank Research - 25 Jun 2014