Re: The Epic 
Property Developers - Of RPGT and GST… Get ready for demand to surge!
Property sector-wise, expecting only RPGT hikes for Budget-2014. For the upcoming Budget-2014’s potential impact on property sector, we are only expecting RPGT hikes (30% from 15% for properties sold within 2 years, 15% from 10% for properties sold within the 3-4 years, 10% remains unchanged for properties sold in the 5th year and zero RPGT for properties sold in the 6th year onwards). We believe this has been largely been discounted and priced-in somewhat, but we do expect some slight knee-jerk reactions for a couple of weeks post announcement. We do not expect any other overly harsh measures (e.g. stamp duty hikes, banking measures) as these may have severe repercussions on the economy. Historically, the government only implements one drastic fiscal measure within a year. This also applies to Bank Negara Malaysia’s (BNM) measures and so far, we have already seen one i.e. reduced mortgage tenures to 35 years from 45 years in Jul-13. We also expect more measures on increasing affordable housing supply to be announced in the Budget.
If GST is implemented in 2015, expect pre-implementation ‘panic buying’ i.e. in 2014, assuming no major changes in the banking sector policy affecting the sector. Experience from other countries had seen such trends in anticipation of future cost push inflations on asset prices. This will be beneficial to developers’ 2014 sales, as financing terms for the primary market is more favourable compared to that of the secondary (e.g. DIBS, rebates, LTVs, lending rates, property valuations, etc.) and we do expect developers to front-load their launches in 2014 on the back of higher demand, which will be a big booster to future earnings. However, if the GST implementation timeline is not announced during Budget-2014, we may revisit our stock/sector calls.
In the case of the Johor property market, we may likely see two measures by year end: (1) Restricting foreign buyers from buying secondary properties from locals although they will be allowed to buy from secondary properties owned by other foreigners, and (2) new property levies on foreign buyers (proposed 4%-5% tax rate of the sales price, with the proposal to be made by year end). Measure (1) will actually bode well for the rental market and new launches i.e. developers while measure (2) is unlikely to slow down demand from foreigners, especially Singaporeans, as properties in Singapore are 3x-5x more expensive than Johor. Neither will demand be overly deterred by new levies on foreigners buying properties in Johor as Singapore’s entry, exit and holding costs for property investment are much steeper while Johor property values are significantly cheaper than Singapore.
We expect large developers to stage a rebound by year end as they have corrected the most. We also note that larger cap developers’ valuations are trading below average to trough levels post the sell-downs in 3Q13, suggesting limited downside risks. Under our coverage, this is applicable to UEMSUNRISE (OP; TP: RM3.70), IJMLAND (OP; TP: RM3.60) and MAHSING (OP; TP: RM2.56). We also believe there will be more positive news flow by year-end (e.g. Singapore-Johor RTS, Pengerang news) while 2015 will see potential IPOs and listing entry of new companies (e.g. Medini Iskandar, IWH, Eco World’s RTO of Focal Aims).
Reiterate OVERWEIGHT on developers. In our universe, most of the developers results were within expectations while sales assumptions are mainly intact, which support the next one year’s earnings visibility. We are likely to maintain OVERWEIGHT until 2Q14, baring any unforeseen negative policy measures on the sector. UEMLAND will be our TOP PICK for 4Q13 while we also like IJMLAND as our second preferred pick.
Risks to our sector call. If one or more of the high risk measures are announced, in addition to the RPGT hikes, we may look to downgrade the sector to NEUTRAL/UNDERWEIGHT and have provided a worse-case scenario tentative CALLs/TPs for the stocks under our coverage.
KEY POINTS
Result Review
Mainly within expectations. Developers earnings performance were mainly within our and market expectations, save for: (i) SPSETIA (MP; TP: RM3.60) which came in below market and our expectations due to overly aggressive estimates as we later discovered that its 9M13 billings were skewed towards high-rises, which typically mean slower billings at initial stages, (ii) CRESCENDO (OP; TP: RM3.56) which beat our and market expectations on strong margin expansions, and (iii) HUNZA (MP; TP: RM2.40) which came in slightly above ours but still within market estimates on better inventory sales. Sales were mainly within expectations save for: (i) UOA (OP; TP: RM2.41) who was proportionately ahead due to timing of launches, which was heavily weighted in 1H13, (ii) HUAYANG (OP; TP: RM3.52) which sales were slower than expected due to delays of launches premised on GE uncertainties, and (iii) SPSETIA beating its full year sales estimates of RM5.5b within 10 months due to stronger overseas operations. We note that larger developers in net cash positions like UOA were more confident in terms of launches during the period running up to GE vs. smaller ones like HUAYANG and CRESCENDO which have 0.5x and 0.1x net gearing, respectively. Three companies, namely SPSETIA, CRESCENDO and HUNZA paid out interim dividends while HUNZA also surprised with share dividends (25 treasury shares for 1000 shares held).
There were no major sales and earnings revisions, save for; (i) HUNZA where we revised FY14E earnings higher by 20% on better occupancy rates of Gurney Paragon Mall and more Bandar Putra Bertam launches, (ii) CRESCENDO where we stepped up earnings by 6% as NCIP margins has expanded significantly on the back of a strong ASP growth resulting in a near doubling of gross margins to 41.2% and achieving FY14E earnings growth of +42% YoY, and (iii) SPSETIA’s sales has been revised up to RM7.0b but have scaled back earnings by 8% as these sales are largely from its overseas BTS projects (e.g. Australia, Battersea).
Budget-2014 and Bank Negara Malaysia Measures Expectations
RPGT hikes are inevitable. So far, the market is expecting RPGT hikes and is speculating on the following; 30% from 15% for properties sold within 2 years, 15% from 10% for properties sold within the 3-4 years, 10% remains unchanged for properties sold in the 5th year and no RPGT for properties sold in the 6th year onwards. In our view, this will ironically encourage demand for primary rather than secondary properties.
Will Build-Then-Sell (BTS) models be implemented? Our channel checks reveal that this is a grey area. We believe the Malaysian economy is not ready for a Built-Then-Sell (BTS) model as many smaller developers will not be able to cope with such a model while larger developers with strong financial positions will likely price-in premiums of selling BTS properties. In the current scenario of Sell-Then-Build (STB), property buyers tend to less than a BTS product as the buyer is taking on ‘construction period risks’. A pure BTS implementation will cause a sharp drop in supply while prices will be pushed up. The government has previously mentioned that they intend to implement this in 2015 to resolve risks of abandon housing projects.
Considering a hybrid solution instead of pure BTS. As a result, we understand developers are consulting with the government to reach a middle-ground solution. One of the solutions is to rope in insurance companies to insure property projects to protect end-buyers interests, allowing them to sell STB properties. However, developers that qualify for these insurance schemes must have strong financials and a good track record. Developers that do not qualify for these insurance schemes will need to sell properties on a BTS basis, which reduces end-buyers risks significantly. We believe discussions are still at an early stage and may not be addressed during Budget-2014 announcements. However, if implemented, we view this positively as it will be ‘business as usual’ for our listed developers.
More supply measures to be announced during Budget-2014. We also expect the government to address supply measures, i.e. more affordable housing schemes like My First Home Scheme and PR1MA. We believe that tackling rising property prices and affordability issues via supply, rather than demand, is the best way forward as it does not penalize genuine home owner occupancy buyers Not concerned about BNM measures in the immediate term. For now, we do not expect any major changes in Bank Negara Malaysia’s (BNM) policy as Governor Tan Sri Zeti has mentioned that the current household debt level is not alarming since property non-performing-loans (NPL) remains historically low and BNM’s governor has mentioned that further tightening banking measures on the property sector is unlikely in the meantime. It also appears the main concern lies with personal financing rather than mortgages, which are asset backed. We will be monitoring the situation closely.
One measure at a time. Notably, over the last 5 years, the government has only implemented one ‘harsh’ fiscal measure at any one time during Budget announcements and it has been typically RPGT hikes. Similarly, BNM measures tends to be announced as banking related measures separately from Budget and tends to be at most, only one measure at any one go; as a result, we do not expect any more negative BNM measures for the sector given that they have reduced loan tenures to 35 years from 45 years in Jul-13.
RPGT hikes maybe a non-event on developers’ share prices. If RPGT hikes are the only negative measure announced, we reckon this has already been largely priced-in. Based on our analysis, we note that in the last two RPGT hikes, it resulted in only slight knee-jerk reactions for a couple of weeks as it would have been priced-in prior to Budget announcements. Negative BNM measures on the property sector have a more detrimental impact on developers’ share prices, which will be unlikely as mentioned earlier.
Not expecting any other harsh measures beyond RPGT hikes. We believe the government will be careful in terms of imposing overly harsh measures at one-go as it may have negative repercussions on supporting industries, Malaysia’s GDP growth and the banking sector. Some of these measures (e.g. increases in stamp duties) may also end up hurting lower income earners or potential first home owners which defeat the purpose of increasing home ownerships in Malaysia. The government also has a lot of connectivity projects (e.g. LRT, MRT) and we understand that PRASARANA and MRT CORP will be monetizing these projects via rail-plus-property projects; this is also observable in countries like Hong Kong, Singapore and London. There are also government driven projects like RRI and TRX to consider. (Refer to Table of Property Measures for details and comments of other potential measures).
Not expecting any other harsh measures beyond RPGT hikes. We believe the government will be careful in terms of imposing overly harsh measures at one-go as it may have negative repercussions on supporting industries, Malaysia’s GDP growth and the banking sector. Some of these measures (e.g. increases in stamp duties) may also end up hurting lower income earners or potential first home owners which defeat the purpose of increasing home ownerships in Malaysia. The government also has a lot of connectivity projects (e.g. LRT, MRT) and we understand that PRASARANA and MRT CORP will be monetizing these projects via rail-plus-property projects; this is also observable in countries like Hong Kong, Singapore and London. There are also government driven projects like RRI and TRX to consider. (Refer to Table of Property Measures for details and comments of other potential measures).
Demand tends to surge BEFORE implementation of GST. In an inflationary environment, assets like properties and land will serve as a hedge against inflation. We also gathered that based on historical trends of Australia, New Zealand and Canada, demand will surge before the implementation of GST in anticipation of the increases in new house prices. We can also expect developers to rush to landbank ahead of GST, which should bode well for developer’s news flow; this will be applicable to developers with strong net cash positions (e.g. IJMLAND, UOA) or low net gearing of <0.3x (e.g. UEMSUNRISE, CRESCENDO).
Demand to taper off AFTER implementation of GST. After implementation of GST, property demand is expected to taper off because of: (i) panic buying the year before implementation as the increases in asset prices will price-out many buyers, as well as, exacerbate affordability issues, and (ii) multiplier effect of GST to cause a surge of asset prices which will price-out many buyers. We opine that this will likely be the case, assuming that there are no major negative fiscal property policies or tighter lending liquidity to the sector which is unlikely; recall that BNM Governor Tan Sri Zeti has twice said last month that she is comfortable with the current household debt levels and is unlikely to tighten up further on the mortgage front. Developers may also get ‘caught’ by higher future costs against historical sales given that it takes 2-4 years to complete construction of properties; this will inevitably eat into margins. We believe this may cause developers to expedite development timelines or build ahead of time to avoid future cost increases and those with a strong balance sheet will prevail (refer to previous paragraph for developers with low net gearing to net cash position).
However, in the longer term, we believe the industry will adjust to GST eventually and property activities will return, given that supply and demand will move accordingly upon changes in interest rate, LTV and etc. The government will also need to implement active efforts to boost supply of affordable housings, as seen in countries like Australia as affordability will be affected. In Malaysia, the Government intends to continue building 105,000 units of houses every year under PR1MA for first time home buyers and even extending to second home buyers recently to ease the impact of anticipated price increases.
Will the gap between primary and secondary property prices narrow? We think so. Since secondary residential properties will not be charged GST, we foresee an uptick in demand for the secondary market. As a result, secondary property prices will narrow towards primary ones. Currently, our secondary market demand is lagging behind primary launches as it is more conducive to buy the latter due to the introduction of DIBS and favorable loan terms. However, under the GST system, we believe the demand of secondary market would return because both residential sales and rental are not subject to GST.
Anticipating ‘panic buying’ of properties before GST implementation! In the Malaysian context, we opine that if GST is implemented in 2015, we can expect a ‘panic buying’ of properties the year before implementation i.e. 2014, assuming no major changes in the banking sector policy to the sector. This will bode well for developer’s 2014 sales. While residential properties are likely to be exempted from GST, developers feed-in cost (e.g. building materials) will not be exempted and we do expect developers to pass on the cost. Commercial/industrial based properties will likely see GST charges, although developer will be able to claim back GST credits. This will be beneficial to developers’ 2014 sales, since financing terms for the primary market is more favourable compared to that of the secondary (e.g. DIBS, rebates, LTVs, lending rates, property valuations, etc.) and we do expect developers to front-load their launches in 2014 on the back of higher demand which will be a big booster to future earnings. However, if the GST implementation timeline is not announced during Budget-2014, we may revisit our stock/sector calls.
Johor Property Policies
The Johor property market has done well and most developers with exposures there have seen a 20%-100% surge in their Johor property sales YoY. As a result, Johor property prices have moved up significantly and in some places like Johor city center, Puteri Harbour and Danga Bay, ASPs have reach a record high of RM1400-1500psf, which is comparable to KLCC. We understand that a lot of locals have been buying properties from the primary market in view of flipping it to foreigners when Johor’s economic activities pick-up steam.
As a result, the state government of Johor intend on introducing a few measures which will likely be announced by year end;
1. Restricting foreign buyers from buying secondary properties from locals. However, they will be allowed to buy from secondary properties owned by other foreigners - LIKELY We believe this will create an unhealthy two-tier market within the same area. This may cause unnecessary speculative activities; rather than cooling it-off while there will be a lot of mismatching of pricings. Having said that, we understand that most developments in Johor have low foreign buyers quotas compared to the Klang Valley or Penang. For new launches, foreign buyers quota is capped at 20% for landed and 40% for high rises. So developers building townships or more mass market products (SPSETIA, IJMLAND, MAHSING, CRESCENDO, UEMSUNRISE) will not be significantly affected. However, areas like UEMSUNRISE’ Puteri Harbour, Medini (MAHSING’s Meridin, WCT’s 1Medini and Medini Signature, SUNWAY, E&O) and parts of Danga Bay have exemptions on the foreign buyers quota, resulting in a lot of foreign buyers in those areas. We find this rather strange as Puteri Harbour, Medini and Danga Bay are largely high-end developments and were for foreigners given the future increase in economic activities arising from industrial parks (e.g. Gerbang Nusajaya) and Pengerang.
A plus for developers! Nonetheless, it will augur well for the rental market as foreign ownership will be restricted and locals will enjoy better returns on their property investments, especially when the economic activities in Johor pick-up steam. It may also result in a demand surge for new launches as foreigners will be confined to new launches, which actually bodes well for developers. The measure has not been implemented and is still under discussions although we gather the probability is high. We would prefer if foreigners are only allowed to buy from the secondary market from locals which will increase demand in the secondary market and will be beneficial for the long-term health of the sector. Alternatively, the state government could consider imposing such policies on properties below RM1m/unit. To discourage developers from concentrating on building properties above RM1m/unit, the state government can restrict foreigners to selected areas like Medini, Puteri Harbour and Danga Bay.
2. New property levies on foreign buyers - LIKELY
We understand that the Johor state government is more serious in terms of introducing new levies on foreigners buying properties in Johor (proposed 4%-5% tax rate of the sale price of the property). However, we were also made to understand it will be significantly less detrimental than the stamp duties imposed in Singapore i.e. should not impact demand significantly from foreigners. The likelihood of implementation is high but is unlikely to affect our sector call. There may be some knee-jerk reactions on developers with large exposures to the Johor property market. However, we are likely to maintain our sector call as Johor properties are still 3-5x cheaper than in Singapore where the property tightening measures are also far more severe than in Johor.
3. Raise floor prices to RM1m/unit from current RM500k/unit for foreign buyers – UNLIKELY Our channel checks reveals that nothing has been ‘cast in stone’ yet as it has yet to be proposed or tabled to the state government of Johor. Recall there was earlier consideration that the floor price for foreigners be raised to RM1m/unit from RM500k/unit. We understand that this may actually encourage developers to focus on the higher end market i.e. above RM1m/unit, and may ignore launching products below RM1m/unit which will be more relevant for the locals. As a result, this measure is not likely to be implemented. We prefer if the authorities focuses on increasing supply of affordable homes, which is the right way to address the needs of the local population.
OUR VIEWS
Rebound plays for large developers (>RM1b market cap). During the year, the KLPRP index peaked in 29-May-13 giving YTD returns of 44%. It corrected sharply as the market was affected by Fitch Ratings when it downgraded the short-term outlook on Malaysia from stable to negative. As of 27-Sep-13, the KLPRP index YTD returns stood at 27%. It also appears that the larger cap developers (>RM1b market cap) have weakened more than mid (RM500m-RM999m market cap) or small cap (<RM500m market cap) developers because larger cap developers had higher foreign shareholdings. The small to mid cap developers appeared to be more resilient from the sell down because many tend to offer higher dividend yields of 4%-6% while some stocks (e.g. Hua Yang, Crescendo) began to attract higher institutional shareholdings due to deep valuations supported by the basic need for affordable housing / industrial property which allowed these stocks to re-rate permanently. So, for 4Q13, we prefer to opt for larger cap developers which have seen sharp sell-downs. Under our coverage, this would be UEMSUNRISE and IJMLAND.
Minimal downside risks for large cap developers. We also note that larger cap developers’ valuations are trading below average to trough levels post the sell-downs in 3Q13. In fact, they are trading below their average historical FD RNAV discounts. Under our coverage, this is applicable to UEMSUNRISE, IJMLAND and MAHSING. SPSETIA has also been heavily depressed in terms of valuations and YTD gains. However, this has been the case since early of this year and will likely remain so until there is more clarity on its future leadership.
A lot of goodies to look forward to! We are anticipating a host of positive news towards year-end to 2014: (1) Johor to enjoy the upswing in interest of Iskandar Malaysia properties, (2) Johor-Singapore MRT decision outcome, which should be known by Nov-13, (3) Medini Iskandar’s listing by 1H14 and IWH’s listing within 2014, (4) entry of global brands/personalities which involves catalytic JVs, (5) more G2G agreements with Singapore, including a seamless immigration center, (6) increasing FDIs (e.g. O&G plays in Pengerang and Tanjung Piai) and more visibility from Pengerang, (7) Greater Klang Valley to benefit from the KL-Singapore high-speed rail train news (particularly KLCC or areas within a 5-10km radius from KLCC), TRX (particularly KL), Circle-Line MRT and RRI land awards, and (8) Eco World’s RTO of Focal Aims.
Reiterate OVERWEIGHT on developers. We are likely to maintain OVERWEIGHT until 2Q14, baring any unforeseen negative policy measures on the sector. UEMLAND will be our TOP PICK for 4Q13 while we also like IJMLAND as our second preferred pick. Risks to our sector and stock calls lie with harsher than expected measures during Budget-2014 and we may look to downgrade the sector to NEUTRAL/UNDERWEIGHT.
UEMSUNRISE (OP; TP: RM3.70) is our TOP PICK for 4Q13 largely because we expect the stock to rebound by year-end, especially as it is a FBMKLCI component. We also like them because it’s Fwd PER levels are near trough levels while its Fwd PBV is below average level. More importantly, we believe the stock is a news-flow proxy to Johor, a market which we are still bullish on. To date, most developers are chalking strong sales from the region, especially as Singapore’s property market is no longer conducive for investors while the strength of the SGD bodes well for Johor’s market. We expect news on the Singapore-Johor RTS feasibility study to be known in Nov-13 while listing of Medini Iskandar and Iskandar Waterfront Holdings (IWH) IPOs, which are likely to take place by 2014, will bode well for developers valuations. As an indication, Puteri Harbour’s ferry services to Batam have commenced while routes to Singapore’s Harbour Front will take place in the next couple of months, which would be a watershed. We have an OUTPERFORM call and a TP of RM3.70 based on 20% discount to its FD RNAV of RM4.62 which provides a strong total return of 45%. Based on its last price, UEMSUNRISE is trading at 44% discount to its FD RNAV which is near its historical highest discount levels of 50%.
We also like IJMLAND (OP; TP: RM3.60) as it is in a net cash position, has high content of affordable housing, sizeable exposures to the Johor market, while both Fwd PER and Fwd PBV are trading at trough levels. However, it is less liquid than UEMSUNRISE meaning that IJMLAND’s share price rebounds may not be as strong as UEMSUNRISE in 4Q13. We have an OUTPERFORM call and a TP of RM3.60 based on parity to its FD RNAV which provides a total return of 35%. Based on its last price, IJMLAND is trading at 25% discount to its FD RNAV relative to its historically highest discount levels of 34%.
Risks to our sector call. The downside risks to our sector call includes: (1) more demand curbing measures beyond RPGT hikes – this may include stamp duty hikes, (2) tighter banking policies regarding the property sector (e.g. lower LTVs), (3) removal of DIBS, and (4) delays in property IPOs or infrastructure projects, particularly the Singapore-Johor RTS. These measures will have a bigger impact on higher-end properties or those >RM600k/unit and commercial properties, which tend to have a higher content of property investors rather than owner occupiers. If one or more of these high risk measures are announced, in addition to the RPGT hikes, we may look to downgrade the sector to UNDERWEIGHT and have provided our tentative worse-case scenario CALLs/TPs for the stocks under our coverage. The main premise of our worse-case scenario CALLs are based on TPs using close to or historical high discount rates to their respective FD RNAVs. (Refer to “Worse-case Scenario table in the Appendix”).
Source: Kenanga
