Malaysia Property - DBS Bank

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Malaysia Industry Focus

Malaysia Property Refer to important disclosures at the end of this report

DBS Group Research . Equity

Still in the doldrums 

Slow sales is the new norm due to weak affordability and large unsold inventory



Subdued capital appreciation could cap investor interest



Depleting unbilled sales the key risk



3 Jan 2018

KLCI : 1,782.70 Analyst Quah He Wei, CFA, CFA +603 2604 3966 [email protected] STOCKS 12-mth

Top pick: Yong Tai

Price

Mkt Cap

Target Price

RM

US$m

RM

Performance (%) 3 mth

12 mth

Rating

3.37 1.70 1.10 1.39 1.43 2.20 1.68 1.54

2,536 2,064 1,242 1,018 465 406 237 168

3.65 1.70 1.10 1.65 1.65 2.40 2.00 2.10

(0.9) (5.6) (0.9) (8.6) (8.9) 0.0 (22.9) (5.5)

10.5 32.2 4.8 3.7 (1.4) 13.6 (38.9) 22.2

HOLD HOLD HOLD BUY HOLD BUY HOLD BUY

No signs of recovery. The Malaysia property market is expected to remain lacklustre in 2018 despite the downtrend over the past three years. Evidently, the take-up rate of 24% in 1H2017 is also the lowest over the past 10 years. We believe the concerns of low affordability, prolonged weak sentiment and large incoming supply continue to plague the market. Also, potential buyers may prefer to wait-and-see in 1H2018 given the looming general election which has to be held by Aug 2018. Meanwhile, the threat of interest rate hikes could be a bane when affordability is already a major concern among buyers.

SP Setia Sunway Bhd UEM Sunrise Bhd Eco World Eastern & Oriental Bhd Concepts Matrix Holdings Bhd MKH Berhad Yong Tai Bhd

Unit

RMm

Sales replenishment is key. As more developers venture into the affordable housing segment amid the challenging operating environment, stiff competition in an increasingly crowded space is expected to result in weaker profitability. Sustaining sales momentum will be a key task for developers in 2018 as unbilled sales have been on a declining trend as new sales fail to catch up with their progressive recognition. Therefore, the geographical spread of land bank will be of paramount importance in these trying times, as monetisation of strategic land bank via sellable projects plays a key role in future earnings growth.

25,000

14,000

Maintain high conviction BUY on Yong Tai. Yong Tai stands out as a one-of-its-kind developer that boast competitive advantages from its unique tourism appeal and synergistic property developments in Melaka via its 138-acre Impression City which has received overwhelming response for its maiden launches. The opening of Encore Melaka in Apr 2018 will be a major catalyst. We also like Eco World and Matrix Concepts which have strong unbilled sales from their township developments which offer clear earnings visibility.

ed:CK / sa:BC, PY, CS

Source: AllianceDBS, Bloomberg Finance L.P. Closing price as of 2 Jan 2018

Increasing unsold residential units

12,000

20,000

10,000

15,000

8,000

10,000

6,000 4,000

5,000

2,000

-

2013

2014 2015 Unit (LHS)

2016 1H2017 Value (RHS)

*Only residential units completed and issued with certificate of fitness for occupation but remained unsold for more than 9 months Source: AllianceDBS, NAPIC

Industry Focus Malaysia property

Property market remains subdued in 2018 Malaysia property market has experienced three years of downturn since 2015. Nevertheless, there is unlikely to be a major reversal in 2018 given the persistently weak sentiment. More importantly, the issues of affordability and weak sentiment have continued to affect the property market, leading to the continuous y-o-y decline in the number of property transactions. While the pace of decline has stabilised, we believe it will still take some time for the sector to recover.

Weak sentiment since 2014 130

70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40%

120 110 100 90 80 70

It will remain a buyer’s market in 2018 given the huge unsold inventory which will cap property price appreciation. Worst still, buyers may continue to adopt a wait-and-see attitude in anticipation of lower selling prices. Low affordability remains one of the most common issues voiced out by property buyers, as property prices remain stubbornly high though appreciation growth has slowed down considerably. Y-o-y property transactions in negative territory

3Q17

1Q17

3Q16

1Q16

3Q15

1Q15

3Q14

1Q14

3Q13

1Q13

3Q12

1Q12

3Q11

1Q11

3Q10

MIER consumer sentiment (LHS) Total approved property loan growth (RHS)

Source: AllianceDBS, BNM, MIER

Residential and non-residential property loan growth has shown a positive growth of 9% and 3.2%, respectively, as at Oct 2017 despite the lower number of transactions. We believe the positive figures are largely due to the rising property prices as the value of property transactions in 9M2017 grew by 6.7% despite the contraction of 4.3% in the number of property transactions. Property prices have continued to be on an uptrend although the price gains were more moderate compared to the heydays. Property prices have not come down despite the much-talked about gloom and doom in the market, largely driven by the poor sentiment in the property market. According to National Property Information Centre (NAPIC), 3Q17 property prices grew 5.1% y-o-y which marks the slowest growth since 2010, reflecting the weak sentiment in the Malaysian property market. Nevertheless, demand from genuine homebuyers remains robust, underpinned by relatively healthy economic growth which is projected at 5.8% and 5.4% for 2017 and 2018 respectively.

3Q17

1Q17

3Q16

1Q16

3Q15

1Q15

3Q14

1Q14

3Q13

1Q13

3Q12

1Q12

3Q11

1Q11

3Q10

1Q10

35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20%

60

1Q10

The total number of property transactions in Malaysia dipped by 4.3% in 9M2017, which is mainly attributable to residential and commercial properties which account for 62% and 7% of the total transactions, respectively. This is not surprising as the property market remains in the doldrums due to low affordability. We believe the already poor sentiment will be further exacerbated by the looming general election which has be to be held by Aug 2018, as potential buyers are likely to remain on the side-lines until the uncertainty clears up.

Source: AllianceDBS, NAPIC

Page 2

Industry Focus Malaysia property

Quarterly house price index remains at elevated levels 2010=100 220 200

180 160 140 120

All

Terraced

3Q17

1Q17

3Q16

1Q16

3Q15

1Q15

3Q14

1Q14

3Q13

1Q13

3Q12

1Q12

3Q11

1Q11

3Q10

1Q10

100

High-rise

Source: AllianceDBS, NAPIC

Slower growth of house price index 2010=100 20.0%

We believe the outlook in 2018 will not differ much from what we experienced in 2017 as most developers continue to focus on the affordable housing segment which is getting more crowded. This has also intensified the level of competition as developers strive to replenish their depleting unbilled sales which are critical for them to sustain their earnings growth momentum. Declining property sales is expected to be the same key challenge for the sector though individual developers with niche expertise and brand names could buck the trend. Developers have been facing difficulties in converting their initial high bookings into sales because of stricter bank lending policies, as banks get more cautious towards the property sector despite the keen interest shown by potential home buyers, especially genuine home-occupiers who may be purchasing properties for the first time or upgrading to better homes. In the near term, property price appreciation potential will be capped given the stiff competition and rising incoming supply which has been reflected in the slower growth over the past few quarters. The healthy consolidation has resulted in developers being more prudent and selective with their launches as well as product offerings in the current buyers’ market.

18.0% 16.0% 14.0% 12.0%

10.0% 8.0% 6.0% 4.0% 2.0%

All

Terraced

3Q17

1Q17

3Q16

1Q16

3Q15

1Q15

3Q14

1Q14

3Q13

1Q13

3Q12

1Q12

3Q11

1Q11

3Q10

1Q10

0.0%

High-rise

Source: AllianceDBS, NAPIC

Residential loan approval rates

Developers may suffer from lower margins as they will find it challenging to pass through incremental cost pressure via higher selling prices when the sentiment has been weak. At the same time, developers that have accumulated land bank during the booming times with high land prices may have to revise its master plan as high-end properties are not likely to fare well under current market conditions.

65% 60%

55% 50% 45% 40% 35%

Jul-17

Feb-17

Sep-16

Apr-16

Jun-15

Nov-15

Jan-15

Aug-14

Mar-14

Oct-13

May-13

Dec-12

Jul-12

Feb-12

Sep-11

Apr-11

Nov-10

Jan-10

Jun-10

30%

residential loan approval rates

Source: AllianceDBS, BNM

Page 3

Industry Focus Malaysia property

Imbalance supply-demand dynamics Weak property sales in 1H2017

12,000

20,000

New launch (LHS)

Sales (LHS)

2016

1H2017

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

20%

Take up (RHS)

Source: AllianceDBS, NAPIC

Newly-completed residential units entering market 9%

Mil units 5.60

8%

5.40

7%

5.20

6%

5.00

5%

4.80

4%

4.60

3%

4.20

0%

4.00

Residential stock (RHS)

Growth (LHS)

2Q17*

1%

2016

4.40

2015

2%

2014

14,000

25%

2013

25,000

30%

2012

RMm

35%

2011

Unit

40%

2010

Increasing unsold residential units

45%

2009

For residential properties (including serviced apartments), we believe Johor and Penang will be more vulnerable given incoming supply that is higher-than-national-average relative to the respective state’s existing stock. Meanwhile, the commercial markets in Klang Valley and Johor will be particularly more exposed to the high incoming supply.

50%

2008

We believe the tightening measure, if implemented, will do little to resolve the grave issue of supply glut in the near term given that newly delivered properties have progressively entered the market. As at end-1H2017, Malaysia’s residential stocks have grown by 8% which is also the largest over the past 10 years. The huge incoming supply which is increasingly being converted into unsold inventories will continue to pressure the property market which has also resulted in weak property sales in 1H2017.

100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 -

2007

Media has recently highlighted that the approvals for shopping complexes, offices, serviced apartments and luxury condominiums [in Kuala Lumpur] priced above RM1m will be halted effective 1 Nov 2017. While there has been much uncertainty on the implementation of the blanket ban, the news comes hot on the heels of Bank Negara Malaysia’s (BNM) warning that Malaysia is facing an oversupply of property due to aggressive launches in recent years.

Source: AllianceDBS, NAPIC

10,000

15,000

8,000

10,000

6,000 4,000

5,000

2,000

-

2013

2014 2015 Unit (LHS)

2016 1H2017 Value (RHS)

*Only residential units completed and issued with certificate of fitness for occupation but remained unsold for more than 9 months

Taking cue from listed developers’ relatively flattish sales targets in 2017, we expect the trend to persist in 2018 as the impending general election, which is widely expected to take place in 1H18, will lead to potential buyers adopting a waitand-see attitude for their property purchase decisions. Also, developers’ new launches will face stiff competition from newly completed projects and public housing. Increasingly, property buyers may look at bargain sales from newlycompleted properties as there have been instances where existing owners could not afford the high monthly mortgage instalments.

Source: AllianceDBS, NAPIC

Page 4

Industry Focus Malaysia property

New supply coming onstream % of I n c o mi n g % of HPI Co mp l e ti o n s s to c k supply s to c k Exi s ti n g s to c k HPI g ro wth 2002 156,042 5.1% 605,566 19.9% 3,050,421 104 2003 192,490 5.9% 627,028 19.1% 3,287,733 108 4.0% 2004 165,964 4.8% 641,771 18.5% 3,467,812 113 4.8% 2005 180,600 4.9% 637,208 17.3% 3,680,462 116 2.4% 2006 171,448 4.4% 619,583 16.0% 3,864,432 118 1.9% 2007 181,123 4.5% 573,716 14.1% 4,063,167 124 5.3% 2008 136,881 3.2% 557,502 13.2% 4,220,510 130 4.7% 2009 103,335 2.4% 538,894 12.4% 4,338,609 132 1.5% 2010 99,866 2.2% 533,605 12.0% 4,446,085 141 6.8% 2011 65,866 1.4% 533,844 11.7% 4,547,971 155 9.9% 2012 72,247 1.6% 628,655 13.5% 4,640,269 173 11.8% 2013 78,265 1.7% 696,557 14.8% 4,718,534 193 11.6% 2014 107,747 2.2% 769,788 15.9% 4,848,030 211 9.4% 2015 71,591 1.5% 766,582 15.8% 4,852,986 227 7.4% 2016 78,216 1.6% 829,687 16.8% 4,945,140 242 6.9% 1H2017 43,132 0.8% 485,433 9.1% 5,348,670 n.a. n.a. * Adjustment made for completed projects issued with CCC for incoming supply and existing stock in 2017 HPI – House Price Index Source: AllianceDBS, NAPIC

Huge incoming residential supply flooding the market in 2017 and 2018 2016 KL Se l a n g o r Jo h o r Pe n a n g M e l a ka O th e rs Existing Stock % of Msia

460,296 1,419,474 744,256 408,732 9% 28% 15% 8%

M a l a ys i a

173,445 3%

1,831,734 36%

5,037,937 100%

Incoming supply % of stock

80,941 18%

203,248 200,330 14% 27%

95,843 23%

32,123 19%

367,963 20%

980,448 19%

Planned supply % of stock

92,914 20%

107,513 188,818 8% 25%

50,968 12%

14,780 9%

253,512 14%

708,505 14%

*Including serviced apartments which are classified as commercial properties Source: AllianceDBS, NAPIC

Page 5

Industry Focus Malaysia property

Lower unbilled sales after slow sales in 2017 Developers’ unbilled sales have been declining over the past few years as the downturn in the sector continues to affect their sales replenishment. We believe unbilled sales in 1H18 will fall further as we expect a slow market due to the impending general election. Therefore, new sales in 2H18 will be of paramount importance for developers to sustain their earnings momentum. Also, strong earnings growth experienced over the past two years is unlikely to be repeated going forward. We believe the market sentiment could remain soft in 2018 as the market continues to digest the large unsold inventory.

Property buyers have also become more price sensitive nowadays due to poor affordability and properties’ absolute pricing has become a major consideration for buyers. Developers have been trying to increase the density of their projects so that they could offer cheaper-priced units to potential buyers. Also, we notice an increasing trend of property buyers that purchase cheaper properties further away from city centres, especially in areas that have good public transport connectivity.

Attractive product offerings with strong value proposition are critical to replenish unbilled sales. We believe larger developers with diversified geographical concentration and township exposure will be in a better position to weather the market downturn. This is especially so for those with large land banks acquired years ago at much lower prices which will enable them to price their products competitively. Unbilled sales need strong replenishment

Compa ny UEM Sunrise SP Setia Sunway E&O MKH Eco World Matrix Yong Tai

Prope rty re ve nue Unbille d s a le s FY14A FY15A FY16A FY17 a s a t S e p17 1,783 1,750 1,842 1,752 2,900 74% foreign exposure 3,510 6,223 4,484 3,572 7,050 53% foreign exposure 1,198 1,196 1,209 920 991 5% foreign exposure 372 338 303 594 662 Include JV portions 530 721 941 703 927 148 1,712 2,546 2,925 4,825 exclude EWI 453 750 n.a. 673 1,088 n.a. 55.5 17.9 87.6 1,060

*Financial year end change for Matrix Source: Companies, AllianceDBS

Property sales summary

Prope rty s a le s RM m FY14A FY15A FY16A FY17 UEM Sunrise 2,443 2,357 1,369 1,200 SP Setia 4,623 *4320 3,823 4,000 Sunway 1,711 1,210 1,173 1,100 E&O 730 940 1,101 381 MKH 820 835 776 808 Eco World 3,186 3,016 3,820 4,000 Matrix 630 ~974.2 n.a. 1,031 Yong Tai n.a. n.a. n.a. 823 *14-month period ended Dec15 ~15-month period ended Mar16 Source: Companies, AllianceDBS

Page 6

Industry Focus Malaysia property

We believe the Malaysia property market has entered a phase of stagnation as the structural issue of low affordability will linger on in the coming years. It will require a long-term comprehensive plan to address this issue, and this could present a daunting task to the authorities. While demand remains healthy, thanks to the young demographics in Malaysia, the property market will go through a gestation period after the strong incoming supply since 2017.

Breakdown of residential property transactions in 1H2017 >1m 4%

500k-1m 13%

Affordability declines in recent years RM'000 800

2016

2015

2014

2013

2012

Source: AllianceDBS, NAPIC

Affordability ratio

87% 85%

83%83% 81%

80%

78% 75%

72% 60%

60%

40% 20%

27%

53% 31%

15% 16% 18%

61% 57%

25% 28%

55%

29%

14% 11% 11% 11% 13% 9% 11% 12% 12% 7% 9% 2% 3% 3% 4% 4% 5% 6%

2016

2015

2014

2013

2012

2011

2010

250-500k

500k-1m

Source: AllianceDBS, NAPIC

Page 7

1H2017

15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends Completed Date: 3 Jan 2018 16:35:36 (MYT) Dissemination Date: 3 Jan 2018 17:21:30 (MYT) Sources for all charts and tables are AllianceDBS unless otherwise specified. GENERAL DISCLOSURE/DISCLAIMER This report is prepared by AllianceDBS Research Sdn Bhd (''AllianceDBS''). This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of AllianceDBS Research Sdn Bhd (''AllianceDBS''). The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report. This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein. Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.

Page 10

Industry Focus Malaysia property

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1

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2

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Page 11

Industry Focus Malaysia property RESTRICTIONS ON DISTRIBUTION This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or General located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Australia

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Page 12

Industry Focus Malaysia property United Kingdom

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Page 13

Industry Focus Malaysia property DBS Regional Research Offices HONG KONG DBS Vickers (Hong Kong) Ltd Contact: Paul Yong 18th Floor Man Yee Building 68 Des Voeux Road Central Central, Hong Kong Tel: 65 6878 8888 Fax: 65 65353 418 e-mail: [email protected] Participant of the Stock Exchange of Hong Kong

MALAYSIA AllianceDBS Research Sdn Bhd Contact: Wong Ming Tek (128540 U) 19th Floor, Menara Multi-Purpose, Capital Square, 8 Jalan Munshi Abdullah 50100 Kuala Lumpur, Malaysia. Tel.: 603 2604 3333 Fax: 603 2604 3921 e-mail: [email protected]

INDONESIA PT DBS Vickers Sekuritas (Indonesia) Contact: Maynard Priajaya Arif DBS Bank Tower Ciputra World 1, 32/F Jl. Prof. Dr. Satrio Kav. 3-5 Jakarta 12940, Indonesia Tel: 62 21 3003 4900 Fax: 6221 3003 4943 e-mail: [email protected]

THAILAND DBS Vickers Securities (Thailand) Co Ltd Contact: Chanpen Sirithanarattanakul 989 Siam Piwat Tower Building, 9th, 14th-15th Floor Rama 1 Road, Pathumwan, Bangkok Thailand 10330 Tel. 66 2 857 7831 Fax: 66 2 658 1269 e-mail: [email protected] Company Regn. No 0105539127012 Securities and Exchange Commission, Thailand

SINGAPORE DBS Bank Ltd Contact: Janice Chua 12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore 018982 Tel: 65 6878 8888 Fax: 65 65353 418 e-mail: [email protected] Company Regn. No. 196800306E

Page 14

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Malaysia Property - DBS Bank

Malaysia Industry Focus Malaysia Property Refer to important disclosures at the end of this report DBS Group Research . Equity Still in the doldrum...

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