In the Recently Reported Results, 5 Out of the 8 Companies Under Coverage Came in Within Expectations, While Mah Sing, Ibraco and IOI Properties Performed Below. On Average, Companies Achieved C.44% of Their Full Year Sales Target as of 1H19. The Number of Overhang Residential Units Increased to 32,936 Units (as of 1Q19), With 63% of the Units Priced Above RM300k, Representing 88% in Terms of Value. We Maintain Our NEUTRAL Stance on the Sector Due to the Absence of Near-term Catalysts to Warrant a Re-rating in Our Sector Call.

Results recap. In the recent 2Q19 results season, 5 out of the 8 companies under our coverage came in within expectations, while 3 performed below expectations. For the disappointments, Mah Sing and Ibraco fell short due to lower-than-expected progressive billings and margin product mix, while IOI Properties reported a higher than-expected effective tax rate. Post earnings adjustments, we now expect Mah Sing and Ibraco to record lower earnings, YoY.

Sales numbers on track. Sales figures for the recent results release showed that on average (as of 1H19), companies achieved c.44% of their respective full year sales target. As most planned launches will take place in 2H19, we expect sales to pick up and allow companies to achieve their targets. Note that however, SP Setia had cut their sales target to RM4.55bn (from RM5.65bn) which now represents a decline of - 11% YoY, compared to the initial +10% YoY target.

Overhang continues. The number of overhang residential units increased to 32,936 units in 1Q19 (latest data available) from 10,181 units back in 2014 (+224%). Note that 63% of the overhang units are priced above RM300k, representing 88% in terms of value.

Notable trends. Monthly residential property loan applications and loan approvals were up YoY for the 7M19 period by 10.4% and 12.4%, respectively, showing an improved approval rate of 1.8%. 1Q19 residential transaction volumes showed a growth of 7.5% YoY to 52,212 units (from 48,572 units). Note that 62.2% of these transactions are for houses priced below RM300k, which generally do not provide sustainable margins for developers.

Still no catalyst. We can expect these indicators to continue showing signs of slight growth in the near-term, as it will be further supported by the Home Ownership Campaign (extended to Dec 2019) and the cut in OPR. Nonetheless, we continue to believe these improvements are insufficient to lift the overall market.

Maintain NEUTRAL. We maintain our NEUTRAL stance on the sector despite having 5 BUY calls out of the 8 companies under our coverage, due to the absence of near term catalysts to warrant a broad-based re-rating in our sector call. However, we do not rule out a possible mild recovery of interest towards the sector given the trough valuations (coverage universe P/B at 0.70x or -2SD). We also take this opportunity to recalibrate our valuation for SP Setia (BUY, TP: RM1.92) from TP: RM2.65 as we impute slower GDV launches moving forward and a higher discount of 60% (from 55%) to better reflect the subdued market condition and its underperformance requiring them to cut sales and launch targets.

Top Picks. We continue to like Sunway (BUY, TP: RM2.17) as an underappreciated property-construction conglomerate with mature investment properties, growing trading and quarry division and potential listing of healthcare business. MB World (BUY, TP: RM2.75) 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 - 11 Sept 2019