Highlights

• Despite outperformance of KLPRP index vs. KLCI Index in early part of 2014, it has started and expected to narrow since Sep 14 and into 2015, respectively, given multiple challenges for the sector.

• Property sector to remain weak and property developers’ sales to remain fragile throughout the year, especially post- GST. Buyer to stick to their wait-and-see attitude.

• Mid- to long-term view remains fundamentally unchanged. We expect affordability to improve with a stable and more moderate upward trend.

• We view that demand from genuine house buyers are still intact. This is further supported by Malaysia’s demographic structure as it shows that 20% of population are aged 20-29. Malaysians under this age group are likely to purchase their own property in the next 5-10 years.

• Although banks have turned more cautious in approving housing loans, we saw slight recovery in 2H14, mainly from the improvement from residential properties’ loans. Approval rate for non-residential properties remained weak.

• Over the longer-term, we continue to see rise in property prices, but with decelerated growth. Furthermore, we foresee that Malaysians would begin to adapt to the implementation of GST and higher costs of living in 2016.

• We continue to like property developers who are more concentrated towards affordable housings, landed properties and township developments. We are still cautious with the outlook on property developers in Johor region.

• Hence, we expect developments in southern KL and Penang to perform better as majority of incoming supply into southern KL are township developments or landed properties that caters to the mass market segment, while demand for properties in Penang is sustained and is able to fetch slightly premium value for its land scarcity.

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 thelonger term; increased opportunities within the affordable/mass market segment.

Negatives

• Slowdown in demand for mid/high end segmentand economic growth; tighter lending policies by banks.

Valuation

Maintain NEUTRAL on the sector with top picks:

1) Matrix Concepts (BUY; TP: RM3.74)

2) Tambun Indah (BUY; TP: RM 2.14)

3) Mah Sing (BUY; TP: RM2.42).

Source: Hong Leong Investment Bank Research - 26 Jan 2015