Maintain NEUTRAL as the sector is still plagued with affordability, policy and oversupply issues. We feel the sector still lacks sustainable earnings visibility and growth to justify a re-rating in valuations. While sales numbers reported by developers have generally been good YTD, we believe it would be increasingly hard to drive sales in FY22 given: (i) absence of HOC discounts, and (ii) expected interest rate hikes on the back of a persistent oversupply issue. The high unsold units in circulation and declining HPI are indicators that developers will find it increasingly challenging to drive sales while maintaining margins. That said, we feel that certain developers’ share price has undershot fair valuations and now provides appealing risk-to-reward profile for bottom fishing trading opportunities. Such name includes UEMS (OP; TP: RM0.40), SUNWAY (OP; TP: RM2.05) and SIMEPROP (OP; TP: RM0.735).

FY21 sales for developers under our coverage poised to surpass pre-Covid levels. YTD, sales by most developers under our coverage have been strong with a couple of name such as ECOWLD and Sunway already surpassing internal/our initial sales targets while SIMEPROP and SPSETIA are likely to surpass sales targets by 4QFY21. The strong sales reported by ECOWLD is attributable to its huge online presence and appealing products while Sunway’s strong sales was mainly supported by the buoyant Singaporean market where they have three developments (effective GDV of RM2.5b). Meanwhile, we believe the broad rationale behind the strong sales is due to the low interest rates climate coupled with the ongoing Home Ownership Campaign (HOC) being implemented. Should our FY21 sales target be met by individual developers in 4QFY21 (Feb 2022 reporting), note that cumulative developers’ sales (of RM18.9b) under our coverage would surpass pre-Covid levels mainly thanks to ECOWLD and Sunway’s outstanding performance.

FY22 will be a tougher year to move sales. While FY21 sales have been encouraging, we are less upbeat on FY22 sales prospects. This is due to: (i) absence of HOC – which provides cash savings of RM6.35k to RM28.5k (2.1%-2.9%) for properties worth RM300k-1m, (ii) expected interest rate hike as the economy recovers (in-house assumption imputes 2x 0.25% hike towards end-2022), (iii) property cooling measures implemented in Singapore (in Dec 2021) – which would restrain sales for Sunway, and (iv) growing overhangs and unsold units under construction within the residential market which would create a more competitive market. Therefore, we anticipate a drop in overall YoY sales by developers under our coverage to RM17.75b.

HOC could potentially be extended on the last day of 2021. Should this happen, we are mildly positive as this would provide upside towards our FY22E sales numbers. However, we view such tax holiday assistance as just a temporary measure while the ongoing structural issue of oversupply still persists. In fact, the HOC which was supposed to bring down overhang units and alleviate the oversupply issue have failed given the growing overhang units from overbuilding these past years.

Generally, property development margins YTD have been rather stable. This is attributable to cost controls and efforts to pivot into digital marketing which substantially saved on sales and marketing costs while sales remained healthy. Meanwhile, the developers which saw margins severely deteriorated were MRCB and UEMS which could not reduce cost as quickly as the drop in revenue. This is mainly due to: (i) their lack of fresh sales, (ii) low unbilled sales at the start of the period, and (iii) less nimble cost structure. As for developers with better margins i.e. ECOWLD, Mahsing, IIOPG; we note that ECOWLD and Mahsing had cost write-backs from completed project phases while IIOPG had a land sale gain recognised during their 1QFY22 quarter which contributed to the stronger margins.

Unsold properties remain high for 9MFY21. Based on data from NAPIC, we believe the oversupply issue begun in 2015 when serviced residences started to flood the market in masses despite cooling measures imposed starting 2014. Overhang1 units for serviced residences grew at a whopping CAGR rate of 77% since 2015 till 9MCY21 currently (refer table below highlighted in orange). We opine that this issue which is pressuring house prices 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). In fact, based on latest 9MCY21 data tabulated, unsold units in circulation are near an all-time high at 171k units. Note, a bulk of the overhangs and unsold under construction units from “residential” are from condominium/apartment units. Hence, the oversupply issue mainly revolves around high rise developments.

Filtering the trend of an oversupply of high rises into our coverage of developers, we opined that UEMS, Mahsing, UOADEV, MRCB and Sunway which have a high exposure to high rise developments such as (condomininiums, apartments and service apartments) in KL and Selangor would find it increasingly more challenging to drive sales amidst mounting competition from unsold units and new launches. We believe in order to drive sales, development margins will have to be sacrificed either through higher discounts or better product offerings (i.e. more facilities, freebies or higher degree of furnishing). Exacerbating the issue further would be the higher building material costs currently experienced which further eat into margins.

Negative YoY growth in HPI (Housing Price Index) for 2 consecutive quarters. 3QCY21 marks the second consecutive quarter HPI has dipped into a negative territory on an annual basis (-0.7% in 3Q21 and -1.2% back in 2Q21; refer graph below). While this could be partially attributed to the pandemic, we think the underlying HPI trend has been heading towards negative growth all along and the pandemic just accelerated it. We believe the trend is mainly due to oversupply and affordability issues.

Maintain Neutral. Overall, the sector still remains fundamentally challenged from affordability, policy and oversupply standpoints. Despite the low valuations (in PBV terms), the entire sector still lacks sustainable earnings visibility and growth to justify a re-rating. That said, we feel that certain developers’ share price has undershot fair valuations and now provides appealing risk-to-reward profile for bottom-fishing trading opportunities. Such name includes UEMS, SUNWAY and SIMEPROP.

Our angle for UEMS (OP; TP: RM0.40) comes from: (i) internally-led initiatives to improve bottomline and (ii) potential M&A exercises spearheaded by its major shareholder Khazanah Nasional given its cheap Fwd. PBV of 0.2x.

For Sunway (OP; TP: RM2.05), the angle comes more from its healthcare segment which would provide strong growth in the coming years. Meanwhile, we believe SIMEPROP has better earnings visibility compared to peers as it owns vast land banks (at low rates) in matured townships allowing them to focus on landed/industrial products during these challenging times and therefore be less affected by the high-rise oversupply issue. Given the plunge in share price recently, we seize this opportunity to upgrade SIMEPROP to OUTPERFORM (previously MP) with an unchanged TP of RM0.735.

Source: Kenanga Research - 29 Dec 2021