Highlights

• KLPRP outperformed KLCI for most part of 2017 except for the final two weeks where the latter inched up following window dressing activities. Against the general perception of lacklustre property market, majority of the renowned developers surprisingly held up well.

• Rebound in leading loan indicators. Monthly loan applications and approvals for residential property were up 16.0% yoy and 15.8% yoy for the 11 months period respectively, bucking the declining trend in 2016. This indicates buyers’ interest has improved despite the low approval rate while NPL remains steady.

• Supported by a stronger economy. A gradual recovery in the property sector is supported by favourable economic indicators , albeit the expectation of rising OPR. Hence, we expect a return of interest in the sector given the cheap valuation and rising appetite on domestic growth upcycle.

• Flattish sales target are expected for 2018 after 2017 (achieving target) outperformed 2016 despite the overall lacklustre market, signalling that the market may have bottomed.

• More landbanking exercises are expected in 2018 judging from such increasing trend in 2H17 as developers were more aggressive in hunting for attractive land deals as asking price softened.

• Incoming supply has decelerated and affordable theme to continue with house prices capped by affordability. Affordable properties in proper planned townships and strategic locations will continue to see sustained demand.

• Sector valuation is trading -1SD below mean at 49% discount to RNAV and 0.83x P/B. Valuation is relatively cheap and we can expect the discount to narrow when the property sector begins to gain more interest amid signs of bottoming out.

Rating

NEUTRAL ( ↔ )

• We maintain NEUTRAL due to the absence of near-term catalyst with overhang and affordability issues despite some bottoming signs. However, we expect a mild recovery of interest in the property sector given the cheap valuation and improving market conditions led by favourable economic indicators.

Top Picks

• Sunway (BUY, TP: RM2.25): Given its diversified income stream and declassification from property sector, it is a deep value stock with mature investment properties and underappreciated trading and healthcare businesses.

• SP Setia (BUY, TP: RM4.00): The completion of accretive acquisition of I&P Group will cushion FY18 earnings and drive Setia to become the largest pure property player.

• MB World (BUY, TP: RM2.75): Well positioned to ride on first mover advantage to capture the spillover effect from the growth in the RAPID project in Pengerang and Desaru Coast.

Source: Hong Leong Investment Bank Research - 11 Jan 2018