Highlights

• Recapping 2016… Similar to 2015, property companies continued to underperformed FBMKLCI Index with average return of -5% as compared to FBM KLCI at -3% for the year 2016.

• Leading loan indicator suggests weak sales… For 1H17, we expect sector fundamental to remain largely unchanged with outlook remaining challenging. YTD 2016 (until Nov16), monthly loan applications and approvals for properties mostly gyrated in negative growth territory, reinforces our view that property buyers remain on the wait and see mode.

• Incoming supply remains high… Incoming supply had reduced slightly from the peak of 892k units in 4Q15 to 837k in 3Q16, accounting for 17% of existing stock, but remaining high historically.

• Margin under pressure… In order to boost sales in the challenging market, developers have come out with different kind of creative products. These incentives come with a cost, evidenced by average EBIT margin for developers falling from 27% to 23%.

• Affordable housing drives sales… With house prices capped by affordability, affordable landed properties will continue to see sustained demand.

• HSR – Long term catalyst… We expect the HSR to be the long term catalyst for property development surrounding. Matrix (1,200 acres), UEM Sunrise (4,800 acres) and Sunway (1,770 acres) are the main beneficiaries. We expect oversupply situation in Johor to improve in long term as demand catches up catalysed by HSR.

• Sector valuation at -1 std below average… Sector is now trading at 48% discount to RNAV and 0.7x P/B, one standard deviation below average P/RNAV and P/B bands but lack of near term catalyst for re-rating.

Rating

NEUTRAL ( ↔ )

• We maintain NEUTRAL stance on the sector for 2017 mainly due to absence of near term catalyst. We expect outlook to remain challenging with house prices continue to be capped by low affordability.

Top picks:

• Sunway (BUY, TP: RM3.75): An integrated real estate business that is underappreciated. We believe company’s active effort in capital management will continue to reward shareholders.

• Matrix Concepts (BUY, TP: RM2.89): Well positioned to ride on the affordable housing theme (majority products are priced below RM600k). Dividend yield is one of the highest in the sector at 6%.

Source: Hong Leong Investment Bank Research - 12 Jan 2017