Highlights

• Recapping 2015… Property companies underperformed FBM KLCI Index in 2015 with average return of -7.3 % versus FBM KLCI at -3.4%. Property outlook suffered further weakness in 2H15 with lower consumer sentiment arising from GST imposition, poorer macro envi ronment (i.e. 1MDB, plunge in crude oil price) and weakening Ringgit.
• HPI growth normalise s back to long-term growth rate … Annual house price index (HPI) growth eased to 5.4% in 3Q15 after rising by CAGG of 12.6% from 2010 – 2014. Going forward. we expect HPI growth rate to normalise back to 10-year CAGR of circa 5%
• Leading loan indicators remain weak… Leading indicators such as loan application remain sluggish, declining YoY basis for tenth straight month. Furthermore, tighter bank lending further dampened property sales with approval rate persistently below 50%.
• Supply con tinue s to accelerate… n 3Q15, supply continues to accelerate with incoming supply reach 870k, representing 18% of Malaysia’s existing stocks, the highest since 2004.
• Johor remains oversupplied in near term… Johor region seems to remain oversupplied with incoming supply and planned supply amounting to 47% of existing stock. This is mainly concentrated in the high rise segment (~circa 41% of total incoming supply).
• KL and Selangor remain core market with more balanced demand and supply dynamics… In the next 5 years, demand would outstrip supply due to urbanization and improving infrastructure. Under ETP program, the government aims to grow the Greater KL population to 10m by 2020 from an estimated 8m currently. This would translate into annual housing demand of 100k unit p.a., almost matching the total completion for whole country in 2014.
• Some property stocks are trading close to 5 years historical low of P/B band… Property stocks such as IOI Properties, Mahsing and YNH are trading close to their 5 years historical low of P/B valuation band.
• Prefer companies that… concentrated towards affordable housings, landed properties and township developments for resilient future sales and earnings.

Rating

NEUTRAL

Positives

• : Favourable demographics with housing inflation hedge; increased opportunities within the affordable/mass market segment.

Negatives

• : Prolonged weakening in consumer sentiment and tightening policy from government.

Valuation

• Top picks: IOI Prop (BUY; TP: 2.77) and Matrix Concepts (BUY; TP:RM2.90).
• We maintain most of our recommendations with Matrix Concepts upgraded from HOLD to BUY (dividend yield one of the highest in the sector at 7%). YNH is upgraded from SELL to HOLD (TP:1.85).

Source: Hong Leong Investment Bank Research - 7 Jan 2016