Maintain NEUTRAL in light of the sector’s challenging structural fundamentals of affordability, oversupply, and policy issues. The pandemic appears to have worsened what was already a struggling sector with HPI growth down into the red (-0.9% in 3QCY20). The property overhang situation remains troubled and may not see marked improvements unless there is a meaningful correction in property prices in the near term to encourage demand, while household debt to GDP levels peaked to 87.5% in June 2020 (higher than its previous peak of 86.9% in 2015) due to a sharp contraction in GDP in 2Q 2020 of 17% YoY impacting affordability. Latest launch data suggests that the bulk of 3QCY20 launches were for properties below RM300k (making up 50% of new residential launches). As the market continues to target the more affordable segment going forward, we believe some developers may lower pricing for certain product offerings in the near term to meet sales targets which we have accounted for in our earnings estimates, but we will continue to monitor this situation closely. On a brighter note, going forward, we expect to see stronger sales in FY21 coming off from a low base effect in FY20, and as such better earnings from a stronger 2H 2021, assuming the Covid-19 situation does not worsen and economic activity continues to improve. Although valuations appear fairly appealing at this juncture (0.3 – 0.6x PBV), we believe concrete earnings growth is needed to lure investors back. We maintain our low -1.5 to -2.0 SD valuations on developers under our coverage pending a positive breakthrough for the sector.

HPI growth in the red. The pre-existing oversupply situation has caused Malaysia’s HPI YoY growth to moderate throughout the years. However, this was exacerbated by the Covid-19 pandemic, causing the Malaysian HPI YoY growth to decrease to -0.90% in 3QCY20 (from 0.40% in 2QCY20), and will likely continue to experience low growths in the near term unless a clear recovery emerges.

Property overhang situation largely the fault of residential and serviced apartments which make up 84% of the total overhang. Adding to the economic slowdown concern is the issue of property overhang with the residential overhang caused by high rise units (54% of residential property overhang in Malaysia), while the main price segment is priced >RM500k (45% of overhang units) for properties located in Johor (20%), followed by Selangor (15%) and Kuala Lumpur (10%). This situation is only made worse by the pandemic, and as such we expect product margins to be impacted as developers will be pressured to re-launch and re-brand existing products to clear sales of unsold inventory which would have been priced higher pre Covid-19. Meanwhile new launches as at 3QCY20 are dominated by lower priced units of RM500k.

Source: Kenanga Research - 6 Jan 2021