Maintain NEUTRAL on the sector due to the absence of near-term catalysts needed to warrant a re-rating. Nonetheless, a mild recovery of interest in the sector cannot be ruled out given the trough valuation and the introduction of new policies. Positives signals for 2019 include the total sales trend, leading loan indicators and new budget policies; the negative signals include the worsening overhang issue and revision in RPGT rates. Our top picks include Sunway (BUY, TP: RM2.18) and MB World (BUY, TP: RM2.65).

Market round-up. Most companies under our coverage are on track to achieve the sales targets set, with some already surpassing (e.g. Sunway and MB World). Total sales of major companies under our coverage are likely to remain flat YoY, which is an improvement from the declining trend over the past years. Unbilled sales averaged at a cover ratio of 1.5x, showing decent earnings visibility moving forward. The sector is currently trading at trough valuations, about -2SD below mean (58% discount to RNAV and 0.7x P/B under our coverage). We do not rule out the possibility of narrower discount to RNAV once the positive policy measures take place.

Overhang still a concern. The number of overhang residential units increased to 30,115 units in 3Q18 (from 20,304 units in 3Q17). The situation will be further exacerbated by the increase in unsold units under construction (+20.8%) and unsold units not constructed (+55.8%), potentially adding to more overhang units.

Leading loan indicator. Monthly property loan applications and loan approvals were up YoY for the 11M18 period by 2.7% and 3.5%, respectively. Note that the monthly loan applications were relatively flat YoY (+0.2%) in the first 5 months followed by a boost of 4.6% in the following 6 months, reflecting the wait and see stance taken preceding GE14. NPL remains steady with residential property loan decreasing to 1.05% (from 1.09%) and non-residential property loan increasing to 1.3% (from 1.07%).

Neutral on Budget 2019. The announced Budget 2019 continues to address the issues relating to the lacklustre property market. Key areas include affordability issues, access to financing, addressing overhang units and curbing speculative activities. Budget 2019 easing measures (i.e. stamp duty exemption and financing schemes) are mainly catered to first-time home buyers and houses priced below RM500k. We believe this to be positive to the market as houses priced below RM500k constitutes c.60% of overhang units in the country. On the other hand, we expect a slight negative impact from the revision in RPGT as it would discourage upgraders and investors from purchasing a new property.

Forecast. Unchanged.

Maintain NEUTRAL. We have 6 BUY calls out of the 8 companies under our coverage, largely attributed to bottomed valuations. However, we maintain NEUTRAL on the sector due to the absence of near-term catalysts to warrant a re-rating in our sector call. Nonetheless, a mild recovery of interest in the sector cannot be ruled out given the trough valuations and the introduction of new policies.

Top Picks. We continue to like Sunway (BUY, TP: RM2.18) as an underappreciated property-construction conglomerate with mature investment properties, growing trading division and potential listing of healthcare business. MB World (BUY, TP: RM2.65) is our small-cap pick given its first mover advantage to capture the spill over effect from the growth in the RAPID project in Pengerang and Desaru Coast.

Source: Hong Leong Investment Bank Research - 9 Jan 2019