Maintain NEUTRAL on Property Developers. Lending liquidity to the sector remains challenging and FY15/16E property sales outlook continues to be uninspiring (-12%/+5% YoY). Most developers are concentrating on delivery and realising unsold units and positively, their unbilled sales provide 1-1.5 years earnings visibility with healthy FY15/16E average net gearings of 0.4-0.3x. While sweeter landbank deals have emerged, we get the sense that most developers will stay on the side-lines to preserve balance sheet strength should the market continues to weaken. We expect CY15 Malaysia Residential Transacted Values to see its sharpest decline for the last 10 years. Property share prices continued to decline over 3QCY15, as anticipated last quarter, while valuations weakened further over 3QCY15 inching closer to historical trough levels; note that small-mid cap players took a bigger hit compared to bigger cap developers. We expect a largely NEUTRAL Budget 2016 and the emphasis will be on affordable housing supply, i.e. no major impact on our developers. The odds of the government easing housing policy are slim as affordability remains an issue. Our studies reveal that the market generally turns cautious on property stocks one month before Budget announcement and two months after, assuming a neutral one. Still, we think valuations have formed a temporary bottom. However, there is risk of further de-ratings as developers have yet to guide on 2016 sales outlook while the current environment is too ‘hazy’ to determine whether it will be on par or worse off than 2015. There is also no obvious catalyst for the sector. So, it is still NOT time for a meaningful positioning of property stocks, especially when catalysts are lacking. Nonetheless, for the short-term (1- quarter) horizons, there are potentials for rebounds if some of them reach our hypothetical Floor Prices since many property stocks (especially big caps) are highly institutionalized. We also think that ECOWLD (OP; TP RM1.90) will re-rate closer to its EWI listing (1QCY16). Those banking for long-term value emergence on very cheap valuations, i.e. KSL (OP; TP RM1.72) and HUAYANG (OP; TP RM2.20) must have a minimum 12-month view. For defensive picks, we like UOADEV (OP; TP RM2.10) for its strong cash position and attractive yields of 6.8%.

Mixed strategies amongst developers. After the implementation of GST on 1-Apr, new launches were held back. From June-2015, more developers started releasing new phases of on-going projects, albeit at a relatively smaller scale. Given its newbie status, ECOWLD bucked the trend by launching 4 maiden projects (Eco Sanctuary, Eco Tropics, Eco Business Park III, Eco Terraces) across the 3 major development corridors (Klang Valley, Johor, Penang). For the sector, we had expected landbanking activities to pick up, which was not the case, save for ECOWLD’s proposed acquisition of the Kuala Selangor land. Quite unexpectedly, we saw 3 major land deals aborted (MAHSING’s Seremban and Puchong land, TROP’s Senibong land). While these developers cited reasons relating to legal and CP issues, we get the feeling that developers are treading more cautiously to weather a potentially long bear property market.

Lending liquidity to the sector has deteriorated further. 8M15 residential (non-residential) loans applied continued to see declining trend of -6% (-7%) YoY while residential (non-residential) loans approvals worsened by -11% (-16%) YoY. This comes as no surprise to us as it has been the key challenge this year which is expected to remain so for a while. We reckon that the days of easy credit appear to be long-behind us; as of Aug-15, the ratio of residential loans approved vs. applied has declined to 48% vs. 52% YoY, while the ratio of property loans to the banking system loans approved has declined to 38% from 43% YoY. Developers continue to lament about the high attrition rate from booking to SPA sales as many buyers are unable to secure their ideal lending margins. The situation is expected to remain so unless there are positive monetary measures announced. 

Source: Kenanga Research - 7 Oct 2015