Moving into 2021, property developers may potentially see higher sales target YoY (vis-à-vis 2020 actual sales) given the low base effect this year. Recent transacted residential units showed that 62.2% are for houses priced below RM300k (which provides minimal margins for listed developers). With the Home Ownership Campaign (HOC) ending on 31 May 2021, developers will need to continue providing goodies in order to attract bookings. We maintain our NEUTRAL stance on the sector due to the ongoing weak property market environment.

Mixed results. In the latest results reported, 3 out of 6 property companies under coverage came in within expectations, 2 companies (namely IOIPG and SP Setia) came in above expectations, while 1 (UEMS) disappointed. Better-than-expected sales and progressive billings recognitions contributed to the performance of IOIPG and SP Setia while higher-than-expected operating costs resulted in the disappointment of UEMS.

Sales numbers on track. Sales figures for the recent results release showed that on average, companies are on track of their respective full year sales target with the exception of UEMS. Moving into 2021, property developers may potentially see sales target growth YoY (vis-à-vis 2020 actual sales) given the low base effect of this year.

Stats. The number of overhang residential units stands at 30,926 units in 3Q20 (latest data available) from 9,903 units back in 2015 (+212%), of which 45.1% of the units are priced above RM500k. High-rise units make up 54.2% of the total overhang units while 2-3 storey terrace houses make up 27.8%. 3Q20 residential transaction volumes showed 55,845 units being transacted, of which 62.2% of these transactions are for houses priced below RM300k (which provides minimal margins for listed developers).

Leading loan indicator. Monthly residential property loan applications and loan approvals were down YoY for the 9M20 period by -5.5% and -25.9%, respectively , showing a decrease in approval rate of -21.6% which is largely due to the impact of MCO earlier in the year. NPL for residential/non-residential property loans remains steady at 1.11%/1.10% albeit inching up slightly from 1.43%/1.39% YoY.

2021 outlook. We expect 2021 to continue facing a tough operating environment with developers cautiously carrying out its launches and offering discounts on its products. With the Home Ownership Campaign (HOC) ending on 31 May 2021, developers will need to continue providing goodies in order to attract bookings. Our channel check reveals that the listed developers are garnering a sales conversion rate of c.50% and that some buyers still struggle to obtain their desired financing from banks. Nonetheless, given the low base impact of 2020, 2021 may potentially see improved transaction volumes when the economy recovers from the ongoing pandemic.

We maintain our NEUTRAL stance on the sector, due to the ongoing weak property market environment. On the other hand, a potential economic recovery in 2021 coupled with undemanding valuations (coverage universe P/B at 0.5x or more than -2SD below 5-year mean) should lend some support on the downside. We lower our RNAV discounts by 5% on counters which we had aggressively placed discounts over 80% (i.e. SP Setia and UEMS, HOLD calls maintained) to reflect the positive sentiment on a recovery play. For our top picks, we continue to like Sunway (BUY, TP: RM1.95) as an underappreciated property-construction conglomerate with mature investment properties, growing trading and quarry division and potential monetisation of healthcare business. We also like Matrix (BUY, TP: RM2.11) 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 - 17 Dec 2020