KDN: PP 10251/07/2013 (032736) SECTOR UPDATE 21 March 2014 Property Bracing for a cyclical slowdown Property market likely heading for a cyclical slowdown in 2014 We believe the Malaysian property market is heading for a cyclical slowdown NEUTRAL (maintain) after a strong 4-year property bull cycle. While the long-term fundamentals have remained positive (demographics, economic growth), some short-term factors that are cyclical in nature have started to deteriorate. Broadly we expect developers to achieve lower take-up rates and weaker profit margins in view of Absolute Performance (%) higher competition, cautious bank lending, implementation of tough government property cooling measures and lower affordability. 1M 3M 12M IJM Land +17.9 +12.1 +27.4 Developers fine-tune product line-up to cushion slowdown IOIPG -0.4 na -na To cushion the slowdown, developers have fine-tuned their product line-up and SP Setia 0.0 -5.4 -8.2 Sunway +5.5 +11.2 +21.8 marketing strategy. This includes launching new projects across different Trop +13.4 +12.5 +0.3 property hot spots to diversify geographical risk and tap into a larger pool of UOA +7.1 +5.5 +13.2 buyers. The developers are also switching their product mix to launch more landed properties where demand is more resilient, and stepping up their marketing campaigns to attract foreign buyers from Singapore, Indonesia, China, Hong Kong and Japan. Relative Performance Government-led property projects offer opportunities, but also threats GLCs/GLICs and state agencies are becoming increasingly active in property development. While some of the upcoming government-led property projects offer good opportunities to the eventual project winners, it poses substantial competition (threat) to others, especially when several government projects (TRX, Medini) are packaged with special incentives and/or excellent government- funded infrastructures. Backed by high unbilled sales, earnings should remain resilient Notwithstanding our cautious view on the domestic property market, we expect developers’ 2014-15 earnings to remain resilient, underpinned by high unbilled sales. Overall, we forecast the six developers under our coverage to achieve 15% earnings growth in 2014, tapering off to 5% in 2015, driven by higher overseas earnings from the sector heavyweights IOIPG and SP Setia as well as gain on land disposal by Tropicana. Maintain NEUTRAL Maintain NEUTRAL. While we are cautious on the 2014 property market outlook, we believe that downside risk to share prices is limited, in view of the following: (i) developers’ share prices have retraced by 9-28% from their 2013 peak and now trade at a fair 0.4-0.6x P/RNAV, broadly within the historical trading range; (ii) developers’ balance sheets are generally strong and their 2014-15 earnings are still resilient; and (iii) the long-term fundamentals (demographics, economic environment) have remained supportive. Top pick is IJM Land Our top pick for the sector is IJM Land (BUY, TP RM3.30). We continue to like IJM Land for its strong management, good branding, geographically diversified land bank and strong focus on townships/ mass housing developments. We also like Tropicana (BUY, TP RM1.80) for its strategic land bank, undemanding valuation of 0.4x P/RNAV and ongoing asset monetisation and de-gearing Isaac Chow exercise. (603) 2145 0412 [email protected] Peers Comparison Stock Rating Sh Pr TP Mkt Cap YearCore PE (x) EPS growth (%) P/RNAV P/B ROE (%) Div Yield (%) (RM) (RM) (RMm) End CY14 CY15 CY14 CY15 (x) (x) CY14 CY15 FY14 FY15 IOIPG REDUCE 2.59 2.50 8,389 June 12.7 10.3 19.6 24.0 0.6 0.8 5.9 6.8 1.4 1.5 SP Setia REDUCE 2.95 2.80 7,253 Oct 16.2 14.9 -9.6 8.7 0.6 1.3 7.8 8.4 3.6 4.4 Sunway ADD 2.89 3.15 4,981 Dec 10.6 10.3 -14.8 2.9 0.6 0.9 8.6 8.3 3.5 3.5 IJMLand BUY 2.97 3.30 4,630 Mar 12.4 11.8 16.5 5.4 0.8 1.5 11.5 11.2 2.0 2.4 UOA Dev ADD 2.11 2.22 2,827 Dec 8.7 8.5 -5.8 2.1 0.7 1.2 12.9 12.5 6.6 7.1 Tropicana BUY 1.44 1.80 1,999 Dec 5.9 10.5 42.3 -44.1 0.4 0.6 12.6 6.9 4.9 4.5 Source: Affin Note: Pricing as of close on 21 March 2014 Important disclosures at the end of report Page 1 KDN: PP 10251/07/2013 (032736) SECTOR UPDATE 21 March 2014 Long-term fundamentals remain positive… The last property bull cycle was driven by supportive fundamentals Malaysia experienced a strong 4-year property bull cycle that led to substantial increases in both property prices (+43%) and transaction volume. The number of residential property transactions (for units priced above RM250,000) doubled from 40,726 units in 2009 to 82,600 units in 2013 (annualised). Similarly, the value of residential property transactions (for units priced above RM250,000) increased by 116% to RM50.2bn (annualised) in 2013, from RM23.3bn in 2009. The 2010-2013 property bull cycle was, in our view, driven by supportive fundamentals including: (i) Favourable demographics. Malaysia has a young and growing population where 71% of its population is below 40 years old. Importantly, approximately 25% of its population (7.3m people) is between 25-40 years old when the desire to purchase property is, in our view, the strongest. With the backing of parents and access to long-tenure mortgages, this group of buyers was one of the key demand drivers over the 2010-2013 period; Fig 1: Malaysia - numbers of newborn per annum Fig 2: Malaysia - population by age group 85 + ('000) 80 - 84 600.0 75 - 79 70 - 74 500.0 65 - 69 60 - 64 55 - 59 400.0 50 - 54 45 - 49 300.0 40 - 44 (age) 35 - 39 30 - 34 200.0 25 - 29 20 - 24 15 - 19 100.0 10 - 14 5 - 9 0.0 0 - 4 - 500 1,000 1,500 2,000 2,500 3,000 1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 ('000 people) Source: Department of Statistics Source: Department of Statistics (ii) Robust domestic economy. In 2010-13, Malaysia achieved robust annual economic growth of between 4.7-7.4% and maintained a low unemployment rate of 3.0-3.3%; (iii) Lower financing cost. Banks’ average lending rate has declined from 6% in 2008 to 4.5% currently. The lower mortgage cost, coupled with longer mortgage tenures, has lowered the monthly instalment amount, suppressed yields and encouraged property purchases; Fig 3: Malaysia’s real GDP growth and unemployment rate Fig 4: Malaysia banks’ average lending rate (%) (%) GDP Unemployment rate 10.0 10.0 8.0 9.0 8.0 6.0 7.0 4.0 6.0 5.0 2.0 4.0 0.0 3.0 -2.0 2.0 -4.0 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: BNM , CEIC Source: BNM, CEIC Important disclosures at the end of report Page 2 KDN: PP 10251/07/2013 (032736) SECTOR UPDATE 21 March 2014 (iv) Easy financing packages. The proliferation of low downpayments, cash rebates, Developer Interest Bearing Scheme (“DIBS”) and waiver of legal fees, have reduced upfront costs and spurred property investment/ speculation; (v) ETP, infrastructure projects. The government’s Economic Transformation Program (“ETP”) and new infrastructure projects such as highways in Iskandar Malaysia, Klang Valley MRT and LRT extension projects have spurred demand for properties. In addition, warmer Malaysia-Singapore relations have boosted the appeal of Iskandar Malaysia; (vi) Strong pent-up demand due to weak new housing starts during 2008-2010. Low incoming supply and completion during 2010-2011 helped fuel the property bull cycle; and (vii) Malaysia property prices are attractive vis-à-vis properties in Singapore, Hong Kong and China. Fig 5: The amount (sq m) of luxury property US$1m will buy (Sq m) 180.0 170.0 160.0 140.0 120.0 95.7 100.0 75.5 80.0 52.6 60.0 46.2 40.0 32.6 20.6 20.0 - Hong Kong Singapore Shanghai Beijing Tokyo** Mumbai Kuala Lumpur ** Based on prime price as at Sept 2013 Source: The Edge Weekly (all data comes from Knight Frank Network) Important disclosures at the end of report Page 3 KDN: PP 10251/07/2013 (032736) SECTOR UPDATE 21 March 2014 However, the market is heading for a cyclical slowdown Property market heading for a cyclical slowdown in 2014 Moving into 2014, we believe that the Malaysia property market is heading for a cyclical slowdown. While some of the above-mentioned long-term fundamentals have remained positive (demographics, economic growth), others have started to deteriorate. In our view, developers will see lower take-up rates for their 2014 launches given the following: (i) Incoming supply at record high. Malaysia housing starts (excluding low-cost housing) hit a trough in 2009-2010 with quarterly supply of around16,000-20,000 units. The housing starts have since picked up strongly, averaging 34,000 units per quarter in 2013. As at end-Dec 2013, the incoming supply was at an all-time high of 571,000 units.