HLBank Research Highlights

Property - Playing Catch Up

Publish date: Tue, 07 Feb 2023, 09:14 AM
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This blog publishes research reports from Hong Leong Investment Bank

The property sector which had been a laggard in the past few years started playing catch up in the past month following several positive developments, including (i) BNM rate hike pause; (ii) speed-up and easing of foreign labour intake approval time and requirements; (iii) China’s border reopening; and (iv) ringgit strengthening. Following the brightening sector prospects while valuation still remains undemanding with sector P/B trading at -0.49SD below its 5-year mean, we upgrade our sector rating to OVERWEIGHT (from neutral). Our sector top picks are Sunway, OSK and IOIProp.

A good start for KLPRP Index. The year was off to a good start for the KLPRP Index as it recorded a YTD gain of +7.3% outperforming the broader KLCI Index which traded flat at -0.3%. This was following its underperformance in 2022 with loss of -8.9% (vs. KLCI Index loss of -4.6%) (see Figure #1). While we are only one month in to the year, several key developments have already taken place, including (i) BNM’s rate hike pause; (ii) speed-up and easing of foreign labour intake approval time and requirements; (iii) China’s border reopening on 8 Jan; and (iv) ringgit strengthening.

BNM rate hike pause. Perhaps the most significant development for the sector was BNM’s decision for a rate hike pause on 19 Jan. As we have highlighted previously, BNM’s rate hike cycle post-pandemic is not unexpected by the market and home buyers, given that historically the OPR had always hovered around the mean range of 3-3.25% and as such, home buyers are unlikely to factor in a low rate environment as their base case in their home purchasing decision. However, the rate hike pause this time is consequential in the sense that it signals a deceleration in the rate hike pace and increased probability that the terminal OPR rate may end at the lower range of 3% (instead of 3.25%). This should augur favourably for overall housing demand and more so for the affordable to mid-range properties (Mah Sing, Matrix, OSK) where buyers are more interest rate sensitive. On the other hand, the rate hike pause also provided a much needed breathing room for developers with high debt levels denominated in ringgit (SP Setia with net gearing of 1.01x as at 30 Sep 2022).

Improving foreign labour intake process. Earlier this month, Minister of Home Affairs Datuk Seri Saifuddin Nasution Ismail announced that the country will be temporarily easing its rules on foreign labour hiring in five critical industries, including manufacturing, construction, plantations, agriculture and food and beverage. Some of the key measures include: (i) processing and approving applications within three working days; (ii) suspending the requirement for job vacancy advertisement on MyFutureJobs portal, which could trim 30 days from the entire process; and (iii) waiving quotas and employment pre-conditions for hiring from selected 15 source countries. The speed up in foreign labour intake will benefit the whole sector, which was heavily impacted by labour shortage issue. For developers with sizeable unbilled sales in Malaysia, we may potentially see upside to earnings in CY23 due to speed up in site progress and earnings recognition. These developers include UEMS (1.86x cover ratio), Mah Sing (1.71x cover ratio), SimeProp (1.69x cover ratio) and Matrix (1.52x cover ratio), where cover ratio is calculated as unbilled sales divided by previous FY property development revenue.

China’s border reopening. We have highlighted in our report in Sep 2022 that China will be the wild card that provides support to our economy and cushion the impact of slowdown in the western economies. This has played out with China’s easing of Covid restrictions and its border reopening on 8 Jan. China’s economic revival from its reopening measures should help its beleaguered property sector which was hit by the government’s squeeze on new financing for developers, pandemic repercussions and mortgage boycotts by owners of unfinished homes. Recently, the Chinese government also pledged support for first time home buyers via easing of mortgage rates and lowering down payments. In this regard, IOIPG is well positioned to capture this recovery in home demand. Amid concerns by Chinese home buyers on developer’s financials to deliver projects, IOIPG stands out by showcasing actual completed units. As at 1QFY23, it has a sizable RM1.26bn worth of completed inventories in China. Other than this, China’s borders reopening may also reignite Chinese’ buying interest in Malaysia properties. Nonetheless, this will likely only benefit the high end developers , as each state has a minimum price set for foreign buyers. For example, the minimum price threshold in KL for foreign buyers is RM1m. In addition, the current strengthening ringgit will also make the local properties more expensive and as such, the benefit from Chinese buying should be limited.

Ringgit strengthening. Ringgit has strengthened substantially against USD as USD/MYR eased from its high of 4.75 on 4 Nov 2022 to 4.26 on 3 Feb 2023. Firstly, we believe this should boost consumer sentiment and spending through the wealth effect as posited by behavioural economic theory. While there is no change in income level and cost of homes in local currency, consumers nonetheless feel more financially secured and confident of their wealth as their wealth appreciated against the USD. Secondly, in 2022, when the ringgit depreciated against USD, we witnessed an outflow of capital in the local equity market towards USD currency. With the tide turned now as ringgit strengthens, a potential reversal in foreign fund flow could happen. Not to mention the local equity market is now trading at undemanding level, while corporate earnings are expected to improve on the back of (i) the absence of Prosperity Tax; and (ii) commodities and tourism-related sectors benefitting from China’s reopening. The property sector which is considered a laggard may also benefit from the foreign fund flow.  

Other than that, imported raw material such as coal used for steel and cement production will also be cheaper as the ringgit strengthens. Consequently, there is a possibility of cost savings pass-through for these building materials. The downside risk to this would be demand-pull driven price increase led by China’s demand rebound, which may offset this impact. Finally, the demand-supply dynamics in the foreign labour market may also tilt more favourably towards the employer due to (i) easing tightness in labour supply with anticipated incoming of foreign labour; and (ii) strengthening ringgit making Malaysia a more attractive destination for foreign labour to work. Note that the ringgit has strengthened against Indonesian Rupiah, Bangladeshi Taka and Nepalese Rupee (see Figure #2-#4). Consequently, when foreign labours convert the ringgit back to their home currencies, this will translate to a higher amount. These two factors may potentially lead to slight easing in labour cost.

Upcoming 4Q results. While 4Q is typically a seasonally stronger quarter for propert y developers as property agents rush to close their sales towards year end in order to hit their annual sales target, nonetheless, we may not witness similar strength this time around for 4Q22. This is because sales are likely to be impacted by the election as both home buyers and developers prefer to wait-and-see due to political and policy uncertainties surrounding the election. Other than that, earnings may also continue to see some weakness as a result of labour shortage. More importantly, however, is that in the upcoming results, as developers close their financial year end, they will set a new sales and launch target for FY23. These targets together with the narratives behind the target setting will provide valuable on-the-ground insights on their view and outlook for the sector, economy and current administration.  

Following the brightening sector prospects while valuation remains undemanding with sector P/B trading at -0.49SD below its 5-year mean (see Figure #5), we upgrade our sector rating to OVERWEIGHT (from neutral). Nonetheless, with a projected GDP growth in a moderate range of 4-5% as projected by BNM, this is unlikely to create a “high tide” that would see a significant uplift in demand for the entire sector. However, there remains certain sweet spots in the sector that should see more resilient demand, including (i) the affordable to mid-range properties in the Klang Valley region; and (ii) affordable landed townships in the fringe areas of Klang Valley (greater Klang Valley). Both of these segments will benefit from the growing middle income segment in the Klang Valley region.  

Our top picks for the sector are 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; and (ii) 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. Given the positive outlook especially from its property development and capital financing segments, the stock could potentially be re-rated as it gains investors’ focus. Finally, we also continue to favour IOIPG (BUY; TP: RM1.59) due to (i) the improving property outlook in China; and (ii) its strengthening property investment segment.



Source: Hong Leong Investment Bank Research - 7 Feb 2023

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