We downgrade IOI Properties to NEUTRAL, mainly on valuation grounds.Our TP is kept at MYR2.38 (3% upside). Being one of the sector bellwethers, we think IOI Properties would be similarly affected by the overall property market trend. The 15-20% contribution from its property investment and leisure & hospitality segments appears to be insufficient to offset the potential downside risk.

Downgrade to NEUTRAL. Given only a 3% upside, we downgrade IOI Properties to NEUTRAL (from Trading Buy), with an unchanged TP of MYR2.38, based on a 50% discount to RNAV. The overall property market trend (ie slow transactions and a downtrend in property prices) is unfavourable to all developers generally. We also expect its sales from the Johor region, which currently contributes around 15-20%, to fall further.

• Recurring income segment still small. While downside in earnings may be cushioned by the recurring income generated from the property investment and leisure & hospitality segments, we think the 15-20% contribution from both segments is still insufficient to offset the weakness in the property development segment. Moreover, the opening of some newly-constructed office and hotels (eg Puchong Financial Corporate Centre (PFCC) and South Beach commercial blocks in Singapore) may potentially incur some upfront/start-up costs.

• Developers struggling to secure sales. The property sector in Malaysia will likely go through a prolonged downcycle, due to unfavourable macroeconomic factors and market sentiment. Based on our observations, many developers have introduced many new marketing schemes to attract buyers. In our view, even if the developer interest-bearing scheme (DIBS) is reinstated, the “perceived” positive impact is insignificant as banks would continue to tighten their mortgage lending. More importantly, demand should remain subdued due to inflationary pressure and high household leverage.

• Unemployment a key risk to the sector. We highlight that the weak housing cycles in the past are typically associated with a drop in labour force participation rate. Based on the latest available data, the labour force participation rate stood at 67.8% in 2015, rising steadily from 62.6% in 2008 post-subprime crisis. However, given recent economic developments, we reasonably expect the rate in 2016 to fall, which in turn will most likely lead to a fall in residential property prices. Last year, the oil & gas and banking sectors were the worst-hit, as the sharp plunge in crude oil prices resulted in weak banks have started to restrict lending to borrowers who work in the oil & gas sector.