Mar 26, 2010

Latest KLSE Property Sector and Stocks Analysis

No post-hike blues
•  Property sales remain robust despite interest rate hike and less incentives
•  Developers bringing forward launches and raising ASP by 10-30% on strong demand
•  Expect sales to remain resilient with economic recovery, inflation-hedging
•  Strong sales momentum not reflected in share prices.
Top pick: SP Setia.
P Setia : Sector leader - largest residential property developer by market cap and sales
Eastern & Oriental : Largest niche high-end developer with exposure to prime landbank in Penang and
KL DNP Holdings : Niche high-end developer in KLCC. 55% owned by ing Tai. Also has exposure to mass residential in Penang.
Sunrise Berhad : High-end and commercial developer in prime Mont’ Kiara and around KLCC   

Minimal dent. Despite the recent 25bps hike in interest rates, take up for new launches remained strong especially for landed,
gated and guarded developments in prime areas. Sime Darby’s
Seri Pilmoor at Ara Damansara (a suburb in Selangor) saw all semi-detached (34 units) and 60% of bungalows (74 units) booked in one weekend, despite record prices of RM2.9-3.3m and RM4.4-6m, respectively. Even the high bumi quota of 50%
(vs typical 30%) has been met. Last weekend, the 180-unit Sunway SPK 3 Harmoni (next to the successful DesaPark City
township in KL) saw 80% bookings by SunCity’s staff and previous Sunway SPK owners, despite the RM900k price-tag for a townhouse. Upcoming launches, even in less prime areas like Selayang, are also seeing strong interest. Buyers are rushing to lock in prices and mortgage rates before they escalate further. Affordability has improved significantly over the last 5 years due to higher margin of financing (90% for locals), longer tenures (up to 40 years) and lower mortgage rates (BLR- vs BLR+ previously). 
Developers more confident. Demand for property remain
robust despite higher mortgage rates (+60bps ie BLR-1.8% vs BLR-2.4% previously) and less zero-entry-cost packages offered by banks. Some developers have withdrawn incentives such as interest-free during construction and stamp duty absorption, and raised average selling prices by 10-30% (between planning stage and launch date), which means stronger margins. Developers are bringing forward launches to tap on strong pent-up demand driven by an improved economic outlook and inflation hedging (especially with the introduction of GST in 2011). 
Strong sales momentum not reflected in share price. The Malaysian property sector is trading at 0.74x P/BV (0.58x P/RNAV), still below 0.77x historical mean despite the recovery in sales and margins. Concerns over rising interest rates are misplaced as: a) property sales have low correlation with interest rate hikes, and b)marginal impact on household income - although every 25bps hike would raise monthly installment by 3%, the absolute increase is negligible (only RM71 for a RM500k house, assuming 90% margin and 40-year loan). Policy risk is also relatively low as there is no property bubble in Malaysia as house prices have been tracking income growth and inflation, while household gearing (40%) and mortgage NPLs (4%) are at comfortable levels. We remain positive on the Malaysian property sector. Our top pick, SP Setia, is the sector leader and largest residential developer. 
above: click to enlarge
above: click to enlarge
above: property sector stocks comparison (click to enlarge)
source: HDB Vickers Research