Maintain NEUTRAL on Property Developers. New launches have been relatively quiet over 2QCY15 given the weak demand sentiment and challenging lending environment. Hence, 57% of developers under our coverage are behind their sales targets. Our earlier fears were not unfounded as most developers’ share prices fell further by up to 24% over 2QCY15, although they appeared to have bottomed towards the end of 1QCY15. Most launches are skewed towards 2H15 while some developers have only just started to offer previews of their projects. While we gather that bookings and registrations are high, possibly due to pent-up demand, the tighter lending environment has resulted in higher attrition rates when it comes to converting booking sales to SPAs. As a result, data on take-up rates are still lacking and since we are only at the half-year mark, this does raise concerns on whether developers can meet even their already toned-down sales target. Thus, we need another 2-3 months to make another assessment. Valuations are also finding new bottoms as c.70% of developers under our coverage experienced Fwd PER/PBV compressions while the sector’s FD RNAV discount has widened to 52% from 50% last quarter (historical peak: 58%). Even though landbankings are expected to improve, we reckon such newsflows may be patchy while investors may not react overly positively in light of a weaker sales environment. The affordable housing theme will be here to stay but catering to such segments will be challenging for most developers in terms of whether they should use their landbanks for longer-term margin expansion or for shorter-term volume cash-flow. While it may appear that the sector is finding a bottom, there are no fresh catalysts for the sector while it may be susceptible to macroeconomic risks and broad market weakness since it is a highbeta sector which may translate into further share price risks. Short-term investors are advised to stay on the side-lines. Capital preservation alternatives include SPSETIA (OP; TP: RM3.95) and UOADEV (MP; TP: RM2.10). Long-term investors must have more than 9-12 months’ view and our recommended picks are KSL (OP; TP: RM2.15), HUAYANG (OP; TP: RM2.20) and ECOWLD (OP; TP: RM2.05).

Events have unfolded as expected. As expected, developers were very quiet over 2QCY15 in terms of new launches given the challenging property market while sentiment turned cautious running up to GST implementation on 1-Apr. Over the quarter, developers mainly concentrated on improving take-ups of ongoing projects, which, consequently, resulted in: (i) the 2QCY15 reporting season seemingly indicating that developers’ current year’s earning cycle has “bottomed” since 64% of those under our coverage met expectations vs. 36% in 1QCY15, (ii) 57% of developers under coverage missed or are behind schedule in terms of full-year targets vs. 54% in 1QCY15. (Refer to Result Review Sector report on 1/6/15, for more details).

Property share prices did de-rate over 2QCY15. In our previous strategy sector report (6/4/15), we had advised investors to be patient because we felt that while the sector had appeared to have found a ‘temporary bottom’ at that point of time, we remained concerned of potential de-ratings in the sector given the GST-driven structural changes in our economy, macroeconomic concerns and weak market sentiment. We had also mentioned that we would rather wait it out for the quarter before the sector is ‘ripe for the picking’ i.e. short-term investors should avoid the sector while longer-term investors will have to take at least a 9-12 months’ view on property stocks.

It appears that our fears were not unfounded since the KLPRP Index slid by 5.6% over the quarter under review, while the property stocks under our coverage saw the following returns over the same period: (i) SUNWAY, MAHSING and TROPICANA saw range-bound returns between 0%-4%, while (ii) other stocks were sold-down between -3% to -24% over the period. UEMS, IOIPG, ECOWLD and KSL were some of the most heavily bashed down stocks during this period largely due to: (i) concerns over Johor exposures (e.g. UEMS, KSL, ECOWLD), (ii) concerns on ECOWLD’s high leverage and changes in the method of EWI listing, (iii) lack of earnings clarity and direction (e.g. IOIPG). The developers under our coverage unanimously cited that pipeline launches are all skewed towards 2H15 (refer to 1/6/15 sector report for details). Since we are only half-way through CY15, the question to ask is, “will there be more risks to sales and thus, future earnings?”

Source: Kenanga Research - 3 Jul 2015