We see the likelihood of 2020’s sales and GDV launch targets revisions to take place amidst the Covid-19 outbreak. With the outbreak taking a toll on the broader economy, 2020 may record a dip in terms of transacted volumes, if developers do not maintain sufficient discounts to entice buyers. The lower interest rate environment would improve the affordability for home buyers but may not spur sufficient demand for the market. We lower our GDV launch estimates and raise our RNAV discounts by 5%-10% to reflect the halt in operations during the MCO period alongside potential pushbacks in planned launches. We maintain our NEUTRAL stance on the sector, due to the absence of near-term catalysts to warrant a broad-based re-rating. Our top picks remain with Sunway (TP: RM2.07) and Matrix (TP: RM2.06).

Statistics. The number of overhang residential units as of 4Q19 (latest data available) stands at 30,664 units, which shows a 201% increase from 10,181 units back in 2014 but a mild decrease of -7% from the peak of 32,936 units in 1Q19. The slight improvement seen in 2019 can be attributed fewer launches coupled with increased transaction volumes (+6.0% YoY). Note that however, over 60% of these transactions are for houses priced below RM300k, which generally do not provide sustainable margins for developers. Monthly residential property loan applications and loan approvals were up YoY for 2019 by 8.5% and 8.6%, respectively, showing an improved approval rate of 1%. NPL for residential/non-residential property loans remains steady at 1.12%/1.42% albeit inching up slightly from 1.09%/1.31% YoY.

Soft market to persist. We expect transaction volumes in 2020 to be impacted as buyers may opt to wait out on property purchases with Covid-19 taking a toll on the broader economy (our economics team is looking at -6% GDP for 2020). Moreover, we expect footfall at property galleries and showrooms to remain low, at least in the near-term, upon the MCO lifting. Efforts to digitalise property sales will help garner sales during this period but may not be able to fully substitute the effectiveness of being present with a sales representative at a property gallery/showroom. Due to the recent change in political landscape, we also expect buyers to take a wait-and-see approach for any government initiatives (e.g. HOC campaign) or policies (e.g. RPGT removal) once the outbreak subsides. The lower interest rate environment would improve the affordability for home buyers but may not spur sufficient demand for the market; our calculation shows that monthly instalments would decrease by 11.3%, assuming the average loan rates reduce in unison to the OPR cuts i.e. -100bps (- 50bps so far this year and our economics team expects another -50bps; Figure #2). We believe these factors may result in 2020 recording a dip in terms of transacted volumes, if developers do not maintain sufficient discounts to entice buyers. From our recent virtual meeting with Knight Frank, it believes the house price dip during the AFC and GFC should not be used as a benchmark for potential price reaction this year as the market is much more tech-savvy with widely-available information now. It expects house prices to dip by <10% in 2020 or remain flat at best.

Launches likely pushed back. Developers would likely have to pushback on planned project launches given the halt in operations during the MCO period. Post MCO, we expect a window period before developers carry out pipeline launches in order to ensure better take-up; e.g. IOIPG which plans to carry out its launches in China c.2 months after the lifting of lockdown. We also expect some planned launches for 2H20 to be postponed to 2021 as the market would not be able to stomach such volumes due to the aforementioned reasons.

2020 sales target. We see the likelihood of sales targets being revised downwards to reflect a weak market ahead coupled with potential pushbacks in project launches. Most of the developers under coverage had previously set a relatively flat sales target, with the exception of Sunway (+27%) and UEMS (+77%). Overall, we remain cautious on the targets as the ongoing Covid-19 outbreak will dampen sales.

Forecasts and stock rating changes. We lower our GDV launch estimates and raise our RNAV discounts by 5%-10% to reflect the halt in operations during the MCO period alongside potential pushbacks in planned launches. Correspondingly, we lower our core net profit forecasts and TP for companies under our coverage. Post revisions in TPs, we downgrade our rating on MB World to HOLD (from Buy) as we impute a higher discount of 15% to reflect its thinning cover ratio of 0.3x. Ratings for other stocks, on the other hand, remain unchanged.

We maintain our NEUTRAL stance on the sector, due to the absence of near-term catalysts to warrant a broad-based re-rating in this challenging environment. However, the trough valuations (coverage universe P/B at 0.5x or more than -2SD below 5-year mean) should lend some support on the downside. As such, government policies such as RPGT removal or lowering the foreign purchase price thresholds would spur activity in the market. For our top picks, we continue to like Sunway (BUY, TP: RM2.07) as an underappreciated property-construction conglomerate with mature investment properties, growing trading and quarry division and potential monetisation of healthcare business. Note that our lowered TP has imputed the changes in our in house TP for SunCon and SunREIT. We also like Matrix (BUY, TP: RM2.06) 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 - 5 May 2020