Expectations have raced ahead of Budget 2017 (21-Oct) and potential OPR cuts with developers’ share prices performing better than the broad market, indicating that the positives have been priced-in. First-time home buyers will remain a theme for Budget 2017 and we believe the likeliest measure is higher EPF Account 2 allocation and withdrawal limit for first-time home buyers; but this will at best boost sentiment and help developers sustain current sales level instead of driving strong sales growth. The market also expects easing banking policies for the sector that we think is unlikely for Budget 2017 (unless it is for units below RM300k/unit, which has no significant impact on our universe of developers). Money lending guideline for developers are still at a consultative stage and will take time to formalize; nonetheless, our checks indicate that developers are likely to limit such usage for ‘bridging’ entry level gaps in the event of low margin of finance from banks. Aug 2016 Property Loans data has shown improvement following Jul 2016 OPR cut, but sustainability of the momentum requires another 2-3 consecutive months of such improvement. In terms of another potential OPR cut (25bps), it will at best help developers to achieve current sales targets and maintain market share. It may also warrant better consumer sentiment that may buoy share prices temporarily. FD RNAV discount levels are already at mean levels and for the sector to trade above mean levels convincingly, prospects of strong YoY growth in CY17 sales is a must, which requires positive banking related measures. We are also concerned with further earnings risks as seen with SUNWAY’s recent trimming of its sales target. If our expectations materialize, either one of these may happen; (i) investors may TOP SLICE slightly as the market has bought ahead on positive news flow, (ii) investors may continue their trading stance until the next MPC meeting (potential OPR cut). If there are no major positives for Budget 2017, there could be heavy profit-taking amongst developers, particularly big-caps players, which have rallied recently. Maintain NEUTRAL on Developers and we are likely to maintain status quo unless significant easing banking policies are introduced.

Expectations race ahead of Budget 2017 and potential OPR cuts. Since our last sector report (“When Sentiment Supersedes Fundamentals”, 2nd

Sep 2016) where we highlighted potential Budget 2017 expectations (DIBS for first home owners, changes in loan assessment method for first-time home buyers, increase EPF Account 2 from 30% to 40% for first-time home buyers), the KLPRP rose higher at +3.4% YTD vs. the FBMKLCI (+0.7%). However, based on our universe, we note that current Quarter-To-Date (1- Oct to 13-Oct) share price performance has seen an overall average decline of 0.1% vs. 3Q16’s QTD of +9.5%; big caps showed QTD increase of 1.1% (vs. 3Q16 +10.7%) while small-mid caps saw -1.7% QTD (vs. 3Q16 +7.7%). This could indicate that most positives have been priced-in running up to Budget 2017 which will be tabled on 21-Oct.

The question is, will investors take profit upon the good news as the physical property market remains challenging? Is the good news enough to push developers to show strong YoY growth in sales again?

Maintain NEUTRAL on Developers. We have maintained all our CALLs on developers while TPs are mostly unchanged. Since our last sector report (2nd Sep 2016) where we recommended MATRIX as our Preferred Pick, its share price has rallied by 4.8% and is closer to our TP. We may consider an upward revision in MATRIX’s TP depending on what materializes during Budget 2017 especially if there are strong news flow on MVV, which could change the demand landscape of Negeri Sembilan. We believe the property sector is still undergoing a structural change as seen by the changes in sales momentum compared to 2010-14 and property prices are expected to be slightly weaker or flattish going forward, while developers sacrifice margins and land banks to roll out affordable housing products in the name of sales targets, which has margin compression implications. Our house banking sector view is that lending momentum is unlikely to differ from 1H16. We still expect Malaysia’s CY16E residential sales value to decline 2% YoY. Budget 2017 measures need to have not just a sentiment effect but a real fundamental impact on the physical market before we can reconsider a bullish sector call.

Source: Kenanga Research - 19 Oct 2016