Moving Into 2020, We Expect Property Developers to Likely Maintain a Flat Sales Target YoY Amidst the Ongoing Sluggish Market. Recent Transacted Residential Units Showed That 61.4% Are for Houses Priced Below RM300k, Which We Note Generally Does Not Provide Sustainable Margins for Developers. We Believe 2020 May Record a Slower Growth in Terms of Transacted Volumes, If Developers Do Not Maintain the Discounts Given or the Government Does Not Extend the HOC Campaign. We Maintain Our NEUTRAL Stance on the Sector Due to the Absence of Near-term Catalysts to Warrant a Broad-based Re-rating in Our Sector Call.

Sales numbers on track. Sales figures for the recent results release showed that on average (as of 9M19), companies achieved c.70% of their respective full year sales target. As 4Q19 generally garners stronger sales coupled with the number of planned launches to take place, we believe companies will be able to achieve their targets. Moving into 2020, we expect property developers to likely maintain a flat sales target YoY amidst the ongoing sluggish market.

Overhang continues. The number of overhang residential units increased to 31,092 units in 3Q19 (latest data available) from 10,181 units back in 2014 (+205%). States with the higher number of overhang are as follows: (i) Johor - 5,470 units (RM4.3bn); (ii) Perak - 5,126 units (RM1.5bn); (iii) Selangor - 4,872 units (RM3.8bn); and (iv) Penang - 3,508 units (RM3bn). Note that 38% of the overhang units are priced above RM500k, representing 72% in terms of value. High-rise units make up 47% of the total overhang units while 2-3 storey terrace houses make up 30%.

Leading loan indicator. Monthly residential property loan applications and loan approvals were up YoY for the 11M19 period by 8% and 8.6%, respectively, showing an improved approval rate of 1%. NPL for residential/non-residential property loans remains steady at 1.12%/1.43% albeit inching up slightly from 1.09%/1.31% YoY.

Transaction volumes. 3Q19 residential transaction volumes showed 83,186 units being transacted, which includes both the primary and secondary market. Note that however, 65.3% of these transactions are for houses priced below RM300k, which generally do not provide sustainable margins for developers.

2020 outlook. We expect 2020 to continue facing a weak property market sentiment with developers cautiously carrying out its launches and offering discounts on its products. We believe the absence of the Home Ownership Campaign (HOC) may result in 2020 recording a slower growth in terms of transacted volumes, if the developers do not maintain the discounts given or the government does not extend the campaign. As such, any introduction of government incentives which aids in affordability will serve well for the market. We maintain our NEUTRAL stance on the sector despite having 6 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. However, we do not rule out a possible mild recovery of interest towards the sector given the trough valuations (coverage universe P/B at 0.7x or -2SD below 5-year mean). For our 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 monetisation of healthcare business. IOIPG (BUY, TP: RM2.04) remains a deep value stock with huge land bank and investment properties on the back of attractive P/B at 0.35x (industry average of 0.7x). We also like Matrix (BUY, TP: RM2.25) as it rides on the affordable housing theme within its successful townships with cheap land cost and sustained property sales coupled with future potential job flows from its Indonesian venture. Its dividend yield of over 6% remains one of the highest in the sector.

Source: Hong Leong Investment Bank Research - 8 Jan 2020