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Positioning in 3Q13 for 4Q13 catalysts [05-07-2013]  
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We reiterate OVERWEIGHT on developers as we are still positive on the sector, especially on Johor plays. Although there are potential negative headwinds from Bank Negara’s cessation of DIBS and Johor property tax on foreign buyers, we believe this will not overly impact demand for the following reasons; 1) there are other developer’s incentive to attract buyers while there is no real tightening of banking liquidity (e.g. 70% LTV caps on 3rd home purchases) to the sector; 2) one-off Johor property tax on foreigners will unlikely deter foreign buyers since Malaysia’s property values are still significantly cheaper than say, countries like Singapore. Based on our checks with those under our coverage, developers are not overly concerned and mentioned that “there are many ways to skin a cat”. So developers’ fundamentals remain intact (e.g. sales targets, earnings, landbanking aims and balance sheet health).

Negatives mostly priced-in... The recent sell-down on the sector has largely priced-in these negatives and admittedly, it will take at least a couple of months for the market to digest the news. We expect Bank Negara to announce its decision on DIBS soon while the Johor property tax news on foreigners will surface by end of the year. Developers may undergo a temporary knee-jerk reaction when the announcements are made, which offers investors an opportunity to Buy-on-Weakness as we are still positive on the sector’s performance in 4Q13.

…positioning for positive news flow. We do expect catalytic news like the RTS, High-Speed-Rail (HSR), TRX awards, more Iskandar news flow while IWH’s listing will be a booster towards late 2013 to early 2014. Additionally, our House views are still bullish on the market and are maintaining its year-end FBMKLCI target at 1800, implying that high-beta developers will likely follow-suit. On top of that, we expect landbanking activities to pick up in momentum since GE has passed given quieter landbanking activities in 1H13; this should lend support to developers share prices.

Reiterate OVERWEIGHT on Developers. Overall, we recommend a Buy-on-Weakness strategy for stocks with OUTPERFORM calls and those with TPs which offer high total returns. We continue to like resilient demand plays like affordable housings and Johor industrial properties and is maintaining CALL/TPs on HUAYANG (OP; TP: RM3.52) and CRESCENDO (OP; TP: RM3.56) as they are not exposed to DIBS while their affordable housing segment only caters to locals.

We also prefer laggard plays like IJMLAND as it has experienced one of the least YTD returns, has limited exposures to DIBS (<10% of on-going projects), lower sales base effect vs. other large developers, net cash position and has catalytic projects in Johor. No changes in CALL/TP for IJMLAND (OP; TP: RM3.50).

TPs of developers with higher exposures to DIBS (>30% exposure) or foreign buyers market in Johor have been adjusted lower by 0.5SD-1.0SD Fwd PBV notches from previous TP levels; although we do not expect a significant impact on demand, the higher FD RNAV discount is to reflect the perception of potential demand risks brought about by these measures. However, even with our TP reductions, calls are still maintained for these stocks based on their total returns. We reduce TPs but maintain CALLs for the following; UEMSUNRISE (OP; TP: RM4.09), MAHSING (OP; TP: RM3.49) and UOA (MP; TP: RM2.41). We maintain MP but adjust lower TPs for SPSETIA (MP; TP: RM3.60) and HUNZA (MP: TP: RM2.09).

KEY POINTS
Sales targets and earnings mainly within expectations. Over 1QCY13, developers results were within street and our expectations, save for HUNZA, which came below market expectations. Most developers met our assumed sales target, save for IJMLAND (above) and HUNZA (below). IJMLAND was the only developer under our coverage where we have revised up their sales target by 16% to RM2.2b. Furthermore, there were some upwards earnings revisions; 1) IJMLAND FY14E earnings were revised up by 5% on higher sales targets; 2) maintained FY13E earnings for HUNZA but raised FY14E earnings by 14% to RM17m (-3% YoY) due to clarity of new launches. Only two developers declared dividends, namely HUAYANG and IJMLAND, which came above expectations. Developers under our coverage mainly recorded core earnings growth of >15% YoY, save for HUNZA, which recorded -52% YoY; QoQ wise, it was a mixed bag due to timing of billings while many developers 1Qs tend to be seasonally weak.

Policies to ensure sector sustainability. Recently, there have been market talks that Bank Negara wants to cease the Developers Interest Borne Scheme (DIBS) and possibility of the Johor state government implementing property taxes on foreign buyers. This was coupled with the US Feds decision to cool its QEs by slowing its bond purchases, which resulted in property stocks being hammered down by 8% on average, between 29-May to 24-Jun. Admittedly, these measures do send-off negative signals, although we take the view that it is necessary for the long-term health of the sector. We address these issues as the following rationales.

Weeding out speculators and ‘overnight’ developers by ceasing DIBS. From our channel checks, it appears Bank Negara wants to cease DIBS to weed-out speculators and ‘overnight’ developers, which has caused primary property prices to surge over the last few years and resulted in more unscrupulous industry practices. Also, we had highlighted in previous reports that there is an increasing divergence between primary and secondary property prices as the former gets to enjoy better financing schemes like rebates, DIBS and “mark-to-market” valuation of properties. Furthermore, we think that DIBS incentivize lending institutions to focus on lending to new projects rather than DIBS as these end-financiers are typically the project financiers as well. Hence, stopping DIBS will help level the playing field between the primary and secondary market which will narrow pricing disparities. So, from a property owner’s stand-point, the removal of DIBS helps one to realize earlier investments.

By ceasing DIBS, we believe more reputable or established developers will still prevail as they have the branding and other marketing techniques to sell their properties. Based on our checks with those under our coverage, developers are not overly concerned and mentioned that “there are many ways to skin a cat”. So developers’ fundamentals remain intact (e.g. sales targets, earnings, landbanking aims and balance sheet health).

Stopping DIBS does not affect the banking liquidity to the sector. This measure should not be viewed as a tightening of banking liquidity to the sector; this is unlike the impact of LTV caps on 3rd home purchases or changes in mortgage assessments from gross to net pay, which resulted in the sector seeing Fwd PBV valuations declining by 2.0 deviations towards -0.5SD to - 1.0SD levels. Measures like the incremental RPGT hikes seen over the last few years usually only result in the temporary knee-jerk correction by Fwd PBVs dropping by 0.5SD for a quarter before rebounding.

DIBS are mainly in the higher-end market; affordable homes not affected. Notably, DIBS is typically offered to higherend properties (especially those >RM700k/unit) which is where most of the speculative activities takeing place. In terms of DIBS exposures on on-going projects, UOA has the highest (almost all projects), followed by MAHSING (37%), UEMSUNRISE (c. 30%), IJMLAND (<10%). We are unclear of the quantum of DIBS exposures for SPSETIA’s on-going projects but believe it will only extend to high-end projects (e.g. KL Eco City), while a large portion of its Johor projects are targeted at locals, with regards to potential Johor property tax on foreigners. Affordable and/or industrial property players like HUAYANG and CRESCENDO are not exposed to DIBS.

Potential Johor property tax on foreign buyers…
The news did not surprise us since prior to GE there were talks about raising the floor price level which foreigners can buy homes (currently floor of RM500k/unit). We believe the property tax refers to a higher quit rent or one-off taxation upon purchase to help fund the local council’s source of revenue. The quantum is not known, although we expect more news by year end. The news has already caused some corrections in share prices amongst Johor based developers.

…does not worry us. In Singapore, foreigners have to pay for additional buyers stamp duty of 15% of home value, whereas in the industrial property space, a levy of 5%-15% of industrial property value for those who buy and sell the asset within 3 years. This is clearly significantly more than the Johor based context where foreign buyers only pay a one-off RM10k/unit levy to the land office. Additionally, Johor properties are far cheaper than Singapore (Singapore’s property prices are 4-5x more than Johor), implying lower absolute property taxes to be paid annually by foreigners. We reckon foreigners, like Singaporeans, are gradually buying into the overall macro story (e.g. Iskandar, Pengerang’s O&G play) and higher property taxes on foreigners will not a big deterrent of demand. Also, for industrials, particular SMEs, Johor still provides far lower operating cost alternatives and longer term business visibility compared to Singapore. We believe the measure is best for the long-term sustainability in demand as the influx of foreign property buyers could price a lot of locals out by causing sharp spikes in asset inflations, especially when foreign buyers from Singapore have an advantage on foreign exchange, which could lead to a property bubble.

Negatives largely priced-in? Mostly, we think. Over the period of 29-May to 24-Jun, developers share prices dropped by 8.1% on average and dipped as low as 23.8%, which we consider as a sharp drop. However, this is understandable since negative news flow surfaced which post GE, developers share price ran-up by 20.4% on average with a peak of 44.7% between 6-May to 28-May. We expect Bank Negara to announce its decision on DIBS soon while the Johor property tax news on foreigners will surface by end of the year. Developers may undergo a temporary knee-jerk reaction when the announcements are made, which offers investors an opportunity to Buy-on-Weakness as we are still positive on the sector’s performance in 4Q13.

Looking forward to more catalytic news flow and landbanking activities. We are anticipating a whole host of positive news towards year-end to early next year; 1) Johor to enjoy the upswing in interest of Iskandar Malaysia properties, Johor- Singapore MRT, IWH’s listing, entry of global brands/personality which involves catalytic JVs, more G2G agreements, including a seamless immigration center and increasing FDIs (e.g. O&G plays in Pengerang and Tanjung Piai); 2) Klang Valley to benefit from the KL-Singapore high-speed rail train news (particularly KL), TRX (particularly KL), Circle-Line MRT and RRI land awards. On top of that, we expect landbanking activities to pick-up in momentum since GE has passed given quieter landbanking activities in 1H13; this should lend support to developers share prices.

High-beta developers to ride on a market run-up. We compared the 3 major sector cycle run-ups since 2007 against the FBMKLCI performance. We note that the KLPRP Index returns during the run-up periods were 2.3x to 4.6x better than the FBMKLCI Index (refer to table below) which is in keeping with it being a high beta sector. Our in-house FMBKLCI target for year end is projected at 1810, offering another 3.6% upside from current levels. Our House views that there will be no liquidity crunch by year-end and is recommending a Buy-on-Weakness strategy. This suggests that developers have more share price upsides, particularly sector laggards like IJMLAND, which has experienced one of the least YTD run-ups of 8% vs. the sector’s average 31%.

Reiterate OVERWEIGHT on Developers. Overall, we recommend a Buy-on-Weakness strategy for stocks with OUTPERFORM
calls and those with TPs which offer high total returns.

1) We continue to like resilient demand plays like affordable housings and Johor industrial properties, and maintain our CALL/TPs on HUAYANG (OP; TP: RM3.52) and CRESCENDO (OP; TP: RM3.56) as they are not exposed to DIBS while their affordable housing segment only caters to locals.

2) We also prefer laggard plays like IJMLAND as it has experienced one of the least YTD returns, has limited exposures to DIBS (<10% of on-going projects), lower sales base effect vs. other large developers, net cash position and has catalytic projects in Johor. No changes in CALL/TP for IJMLAND (OP; TP: RM3.50).

3) TPs of developers with higher exposures to DIBS (>30% exposure) or foreign buyers market in Johor have been adjusted lower by 0.5SD-1.0SD Fwd PBV notches from previous TP levels; although we do not expect a significant impact on demand, the higher FD RNAV discount is to reflect the perception of potential demand risks brought about by these measures. However, even with our TP reductions, calls are still maintained for these stocks based on their total returns. We reduce TPs but maintain CALLs for the following; UEMSUNRISE (OP; TP: RM4.09), MAHSING (OP; TP: RM3.49) and UOA (MP; TP: RM2.41).

4) We maintain MP but adjust lower TPs for SPSETIA (MP; TP: RM3.60) and HUNZA (MP: TP: RM2.09) (refer to tables for explanation).

The real risks. We are most worried of the tightening of bank liquidity to the sector as these tends to result in an immediate  cooling of property demand; examples are lower LTV caps on 2nd home purchases or tightening of financial institution exposures to the mortgage sector. Other demand risks are sharp interest rate hike, which is unlikely soon as our in-house Economist believes that OPR will be maintained at 3.0% over CY13-14. Another concern we have is Budget-2014 which will take place in Oct-13 where talk of more fiscal tightening measures (e.g. higher RPGT) on the property sector could surface – at this juncture, we have not heard any market talks or expect such measures to be implemented given that the RPGT already ranges between 15%-10% in the first 5 years of owning the property.

Source:THE EDGE MALAYSIA
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