Policies are supportive of B40 and M40 groups. We view the housing policies of Budget- 2019 to be supportive to the B40 and M40 segments in terms of promoting home ownerships while we are also positive that the residential overhangs, particular those priced at RM250k/unit and below (73% of the RM22b residential overhang), are being addressed via stamp-duty waivers and concessionary financing rates for the very lowincome segment. The market had widely anticipated that Budget-2019 would be extremely ‘rakyat’ friendly, which was the case. Developers which are also largely positioned with housing projects priced below RM500k/unit (e.g. MAHSING, HUAYANG) would also benefit from the stamp-duty waivers; but we believe this will only at best increase the odds of them meeting their sales targets and sustaining it at current levels into the future. This is because the lending momentum to the sector remains challenging with deteriorating urban affordability. REHDA has also committed to lower house prices by 10% in line with the SST exemptions on construction/building materials, which we believe will inevitably result in further margin compressions for developers as the cost-savings do not have a linear relationship with margins. Furthermore, buyers may adopt a ‘wait-and-see’ stance to enjoy the full effects of such price reduction, implying that sales could slow down for the remaining part of the year. The only silver lining is that as it is, many developers are already offering rebates/discounts and experiencing margin compressions, implying that this measure will at best result in margins being maintained if not weakened. It also implies that the property sector’s ROE, and hence valuations, may take much longer to recover; recall in previous sector reports, we noted that the KLPRP’s ROE has de-rated significantly and is now on par with the KLCON’s ROE. The upcoming first-of-its-kind “property crowdfunding” scheme for first home buyers (to launch in 1Q19 after SC’s clearance) could be a swing-factor for the sector, depending on how extensive this scheme will be, and thus, more details are required before we can determine the efficacy of this scheme. Yesterday, the Prime Minister launched the new crowdfunding platform, FundMyHome.com (powered by EdgeProp), which features c. 1,000 homes priced below RM500k/unit which is currently funded by institutional investors. We think this could boost sentiment for the sector in the near term although we believe that if not done properly, could create systemic risks for the sector and the economy in the long-run. With property valuations dropping to historical trough levels and given clarity from the Budget- 2019, we think that the bashed-down big-boys are worth a relook for rebound plays given the following factors: (i) relatively better earnings sustainability and less margin risks due to overseas drivers or land sales, (ii) dividend yields, which are at a premium to sizeable MREITs, and (iii) historical low Fwd. PER/PBV levels, which means most of the earnings risks has been priced-in. We upgraded our call to OUTPERFORM (from MARKET PERFORM) for the following: IOIPG, UEMS, SUNWAY, MAHSING, UOADEV, SIMEPROP while we maintain OUTPERFORM on SPSETIA. In the meantime, we anticipate more details from the New upcoming National Affordable Housing Policy, and clarity on P2P property crowd funding schemes. We reiterate NEUTRAL on Developers as it will take a while for valuations to properly recover to historical mean levels even though they are currently at very low levels, which may be capped by the risk of margin compressions. Real re-ratings will only come if we see: (i) margin recoveries, and (ii) outperformance in sales targets.

Source: Kenanga Research - 5 Nov 2018