HLBank Research Highlights

Property - Not Out of the Woods Yet

HLInvest
Publish date: Wed, 21 Dec 2022, 09:10 AM
HLInvest
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This blog publishes research reports from Hong Leong Investment Bank

We believe the long term sector dynamics are on the mend where the housing oversupply issue is easing, which will in turn support a more healthy increase in house prices. However, the biggest stumbling block to a sector recovery remains the labour shortage situation which impedes (i) the acceleration of site progress; and (ii) developers from pursuing more aggressive launches. Near term demand remains intact, however, there is a lack of visibility on longer term prospects due to the fluidity of global economy. We maintain our NEUTRAL rating on the sector and advocate investors to seek names that can weather the current near term earnings weakness, which includes developers that have (i) higher completed inventories; (ii) recurring source of income; and (iii) diversified business segments. Our sector top picks are Sunway, OSK and IOIPG.

A commendable 3Q22. Property developers under our coverage registered commendable 3Q22 results with four coming in above our expectations, three within and one below. When stacked against consensus, there were two above, five within and one below expectations. The positive surprise mainly stemmed from stronger-than expected sales, especially from completed or near completion projects (see Figure #1). In terms of sales, four developers are on track or have exceeded their full year sales target, while four are lagging behind. For developers with sales trailing targets, this was mainly due to a slowdown in new launches for the year (see Figure #2). Four out of eight developers have YTD launches that are well below their full year target. The main reason for the slowdown in launches were due to supply side issues, i.e. (i) labour shortage; and (ii) volatile building material costs (see Figure #3).

Sector top picks performed well. In our sector report dated 29 Sep 2022, we anticipated that labour shortage will persist in the near term, impacting developers’ progress and billing recognition. As such, we recommended developers with (i) higher completed inventories (IOIPG); and (ii) property investment segment with recurring income (Sunway, IOIPG) to cushion this impact. Both IOIPG and Sunway’s 3Q22 results came in above our expectation, while their share price appreciated +20.4% and +5.8% (outperforming KLPRP Index gain of +5.1%) since our report.

Preliminary 3Q22 NAPIC housing data. Residential transaction volume saw a healthy pick up of +11.2% QoQ (supported by the economic recovery and healthy job market) and +56.2% YoY (low base previous year due to lockdown restrictions) (see Figure #4). Unsold units eased quite substantially by -13.4% QoQ and continued to trend lower from its peak in 4Q21 registering a -2.5% YoY decline. Due to the lack of new launches this year, sales are mainly supported by completed units and ongoing projects, thus, contributing to the easing of unsold units (see Figure #5). HPI eased -2.1% QoQ and was flattish +0.7% YoY. We believe the tepid HPI reflects the previous overhang situation which peaked at 4Q21 (see Figure #6).

Lack of visibility in 2023 demand outlook. In the near term, we anticipate that demand will hold steady supported by the healthy economic (9M22 GDP: +9.2% YoY) and job market (Oct 2022 unemployment rate: 3.6% vs. pre-pandemic 3.3% in Feb 2020). While we are already at the cusp of a new year, it is difficult to look much further beyond the immediate horizon due to the rapid developments in the global economy. We can however, take some solace that the local economy is expected to be more resilient anchored by firm domestic demand, recovery in tourism activities and large infrastructure projects. Under the new administration, reining in inflation and managing cost of living are at the top of the government’s agenda which should augur well for property demand.

Slight easing in labour supply. On building material cost, on one hand, steel bar price has come off its mid-year peak by around 15-20%, but cement price is creeping up again with current level matching its peak during mid-year. Labour cost is also rising due to the tightness in labour supply coupled with minimum wage hike. The saving grace comes from the gradual incoming of labour supply since 4Q this year. While we anticipate gradual improvement, a full resolution of the situation will likely only happen in 2Q-3Q23. For developers that have ample ongoing projects and completed inventories, they are likely to remain cautious and continue adopt a wait-and-see approach in new launches given that labour supply remains tight while building material costs have yet to stabilize.

We maintain our NEUTRAL rating on the sector. We believe the long term sector dynamic is on the mend where the housing oversupply issue is easing, which will in turn support a more healthy increase in house prices. However, the biggest stumbling block to a sector recovery remains the labour shortage which impedes (i) the acceleration of site progress; and (ii) developers from pursuing more aggressive launches. Near term demand remains intact, however, there is a lack of visibility on the longer term prospects due to the fluidity of global economy. Given such, we observed that the KLPRP Index is moving in lockstep with the bellwether index KLCI Index, tracking closely the global economic developments (see Figure #7). The KLPRP Index is currently trading at around -0.75SD below its 5-year mean PB ratio, which we deem to be fair at this juncture given that the sector is not out of the woods yet (see Figure #8).

We continue to advocate seeking names that can weather the current near term earnings weakness due to the slower progress billings. These are developers that have (i) higher completed inventories; (ii) recurring source of income; and (iii) diversified business segments. As such, we favour Sunway (BUY; TP: RM2.65) given (i) anticipated substantial recognition of its Singapore projects in FY23 amounting to an estimated c.RM150-160m net profit contribution; (ii) stable recurring income from its property investment; and (iii) resilient and growing healthcare segment. Additionally, we also like OSK (BUY; TP: RM1.42) as it is currently deep in value, with its market cap trading below its stake in RHB. It is also one of the few developers that are the least impacted by labour shortage due to its less labour intensive IBS construction method. Its launches remain on track with construction progress running ahead of schedule. Finally, we also continue to favour IOIPG (BUY; TP: RM1.59) due to (i) the improving property outlook in China, (ii) its strengthening property investment segment; and (iii) its higher level of completed inventories supporting sales.

 

Source: Hong Leong Investment Bank Research - 21 Dec 2022

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