Maintain Neutral. Since our last strategy report in April, the numerous MCOs imposed have further pushed back the sector’s recovery trajectory. In addition, due to our relatively slower recovery from Covid-19, Malaysia’s House Price Index (HPI) growth is severely lagging other nations’. That being said, we think Malaysia’s HPI will continue to remain subdued even if we recover from Covid-19 due to the long-standing oversupply issue that started since 2015. In such a challenging environment where affordability, overhangs and policy issues still persist, we prefer developers that showcase nimbleness and capability to deliver earnings and sales numbers. In our experiment to purchase a property virtually, we found that ECOWLD stands out in terms of online integration against other developers making them our preferred pick for the sector.

What changed since our last strategy in April 2021? (1) MCO3.0 was imposed in early May 2021; followed by (ii) FMCO imposed at the start of June 2021, and (iii) the Housing Ownership Campaign was extended to Dec 2021 (from May 2021). Arising from the numerous and extended MCOs which limited productivity, we anticipate further earnings and sales risks for most developer under our coverage for the remainder of the year. Consequently, we adjust our earnings and sales downwards for companies that we have yet to factor in the FMCO impact as tabled below.

Malaysia’s HPI growth is one of the worst. Based on Knight Frank’s Global House Price Index (HPI) tabled below, out of the 56 countries being surveyed, Malaysia ranks the 4th worst when it comes to house price growth in 1QCY21*. We believe this is attributable to two key reasons: - (i) Malaysia’s relatively slower Covid-19 recovery pace and (ii) the oversupply issue.

Besides the ample liquidity coupled with the low interest rate shared globally, the countries that showed strong HPI growth had (i) a shift in buyer preference for bigger homes to suburban areas post pandemic and (ii) a tight property supply situation prior. In our view, these idiosyncratic scenarios cannot be applied in a Malaysian context – hence, even if the Covid-19 situation does improve, we do not foresee a blanket re-rating for property prices.

We will continue to face an oversupply problem that emerged six years ago. Based on NAPIC’s data, we believe the oversupply issue started in 2015 when serviced-residences started to flood the market in masses despite cooling measures being imposed by the government starting 2014. Overhang1 units for serviced residences grew at a whopping CAGR rate of 192% since 2015 till 1QCY21 currently (refer table below highlighted in Orange). We opine this issue is unlikely to abate in the near term given the large amount of overhang and unsold-under-construction2 units still in circulation today (refer table below highlighted in Green). Table below illustrates the growing overhang and unsold-under-construction units since 2015.

We prefer developers that show differentiation. In a buyers’ market where margins will inevitable be squeezed, we prefer developers that can quickly adapt to the changing landscape to maintain sales and earnings. Based on the past year when the pandemic first hit, the developer which stood out among the rest when it comes to online integration was ECOWLD. Below we table out our online integration scoring (based on 10 criteria) for developers in our experience in trying to purchase a property online.

Maintain Neutral. Overall, the sector still remains fundamentally challenged. However, we do see opportunities given the sectors’ value proposition (from a PBV perspective). Hence, we expect rotational plays into the sector every once in a while. Our preferred pick for the sector is ECOWLD which have attractively priced product offerings and the capability to deliver sales and earnings in the immediate term. Below we adjust our calls for Spsetia and Uems to MARKET PERFORM (from OP and UP respectively) given its share prices’ have approached our TPs.

Sector risks include: (i) the domino effects in the event of financial obligation defaults by key property companies, (ii) impairment of receivables/inventories, (iii) falling property prices, and (iv) rising building material costs.

Source: Kenanga Research - 5 Jul 2021