Highlights

• Average FY15 new sales fell by 12% YoY… Among our coverage universe (Fig 1), Matrix is the only developer that managed to achieve positive growth in full year sales (+28% YoY) mainly due to its focus on affordable mass market with pricing range below RM600k.
• Cautiou s on FY16 sales target… Majority of the property developers remain cautious on FY16 outlook with an average sales target growth of 5% (Fig 1). Matrix and EcoWorld are more upbeat with annual sales target growth of 24% and 33% respectively. UEMS has the most bearish tone with lower FY16 sales target of -36% YoY mainly due to concern on oversupply in Johor.
• Indicators remained sluggish but sentiment may have bottomed… Loan application continued to decline YoY basis for twelve straight months (Fig 2). Tight bank lending further dampened property sales with approval rate persistently below 50% and achieved a new low of 38% in Jan-16. Nevertheless, consumer sentiment may have bottomed given the expected improvement in household income (EPF contribution rate cut, civil servant pay rise and minimum wage hike).
• Value emerging with sector trading below -1 std… br /> Sector valuation is trading at 0.64x P/B, below -1 standard valuation (SD) band vs. crisis level of 0.47x (Fig 5) vs. average of 0.82x. For RNAV band, the sector is also trading at 40% discount, slightly below -1 SD. We opine that there is still lack of near-term catalyst for the sector. Any potential relaxing of property measures will be a major re-rating given its low expectation and near bottom valuation.
• Big Caps: IOIPG and SPSB are near bottom valuation… Under our stock coverage (Fig 4), IOIPG and SPSB are trading close to bottom of 10-year P/B band. IOIPG is trading at 0.65x P/B vs. its bottom valuation of 0.53x while SPSB is trading at 1.27x P/B vs. its bottom of 1.12x. Both IOIPG and SPSB have limited downside of 19% and 12% respectively as compared to its bottom of 10 year P/B band.
• IOIPG is trading at a significant discount to its average peer of 1x P/B (Fig 23). We believe the discount is unjustified and should warrant a re-rating given its size of market capitalization and strong track record in township development. Stronger sales from China (relaxation of property measures) and potential monetization of its investment property through REIT will be the long-term catalysts for the stock.

Rating

NEUTRAL

Positives

• Favourable demographics with housing inflation hedge; Negatives: Prolonged weakening in consumer sentiment and tightening policy.

Valuation

• Top Picks: IOI Prop (BUY; TP: 2.77) and Matrix Concepts (BUY; TP:RM2.91). Dividend yield for Matrix is one of the highest in the sector at 7.1%. We also have BUY call on Sunway (TP:3.63) as its subsidiary SunCon will be main beneficiary from MRT2, LRT3, Pan Borneo ,DASH and SUKE.

Source: Hong Leong Investment Bank Research - 23 Mar 2016