Property Singapore - UOB Kay Hian 2015-09-08: Surviving The Burn-down Analysis.

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Surviving The Burn-down Analysis 

• Property stocks are trading near undeserving crisis valuations. Analysis of the peak and trough P/B valuations implies an attractive 7:1 reward-to-risk proposition. 
• Our stress test shows deep value remaining in depressed market conditions. We believe the market has over-discounted the negative prospects. 
• Maintain OVERWEIGHT on the sector. 
• Key re-rating catalyst will be demand-side policy easing by the government. 
• CapitaLand and Wing Tai are our top picks. 

WHAT’S NEW 

• The recent sharp sell-down of property developer stocks saw the property developer index down almost 13% last month, underperforming the broader Singapore market. 

ACTION 

• We remain OVERWEIGHT on the property sector as we believe the market has over-discounted the negative prospects, pricing in a 50-60% correction in property prices. Our burn-down analysis reveals, however, that deep value still remains. CapitaLand and Wing Tai remain as our top picks. 

ESSENTIALS. 

• Developers trading near undeserving crisis valuations. 

• Developers within our coverage currently trade at a distressed 1.46SD below mean RNAV. This brings these counters into severe economic recessionary territory, when they traded at -1.52SD and -2.22SD below average RNAV during the global financial crisis and Asian financial crisis respectively. Mean reversion to their historical discount to long-term RNAV of 13.6% implies 55% upside. 

• Burn-down analysis indicates deep value. 

• In the light of the gloomy domestic residential outlook, we have conducted stress tests across developers within our coverage to factor in the following: 
  1. 50% decline in ASPs of residential properties from 2013’s peak. 
  2. 50% decline in capital values of commercial and retail properties in Singapore. 
  3. 50% decline in capital values of overseas properties and associate contributions. 
• The resulting 12% upside in prices on average despite our conservative assumptions presents an appealing opportunity despite the gloom and doom perceived by the market. 
• Analysis of the peak and trough P/B valuations implies an attractive risk-to-reward proposition of 7:1. Analysis of past P/B peaks and troughs indicates an attractive upside of 203% vs downside risk of 30%. 

• Key re-rating catalyst will be demand-side policy easing by the government. 

• We believe the market has over-discounted the negative prospects, pricing in a 50-60% correction in property prices. We expect a re-rating of developers upon confirmation of price correction being arrested at more moderate 10-20% levels. We believe the relaxation of measures will hinge on several factors: 
  1. Magnitude of correction. We believe this would entail a price fall of 12-15%, which should prompt the government to relax some of the property cooling measures to keep overall price correction within the 20% range. This is the key metric to focus on as the government continues to emphasise that prices should see a meaningful correction. 
  2. Demand and supply. Cutbacks in foreign labour growth leading to a moderation in rental outlook and the implementation of the Total Debt Servicing Ratio (TDSR) have impacted demand. Meanwhile, an increase in the supply of new HDB flats, executive condominiums and private residential units has boosted supply. Vacancy rates for non-landed private residential units have been rising steadily, hitting 8-10% in 3Q14 and 1Q15, the highest levels since 2005, and up from 5.8% in 1Q13. Rising vacancies and the inability of landlords to secure tenants will have an impact on prices, most notably in the high-end segment, where there are already some distressed sales in Sentosa, leading to higher non-performing loans for banks. 
  3. Impetus exists for newly-elected government to calibrate overall home prices beyond severe downshifts. Post the 11 September elections, we believe the newly-elected government will continue fine-tuning policies to avert home prices from plummeting beyond 20%. As 90% of Singaporeans own their homes (the highest rate of home ownership in the world), a drastic downward spiral in property prices could see a shift in sentiment among the electorate.

PEER COMPARISON 

Vikrant Pandey | Derek Chang | http://research.uobkayhian.com/ UOB KH 2015-09-08

BUY Maintain BUY 2.50 Same 2.50

BUY Maintain BUY 4.08 Same 4.08

BUY Maintain BUY 2.86 Same 2.86

BUY Maintain BUY 2.80 Same 2.80

BUY Maintain BUY 10.84 Same 10.84

BUY Maintain BUY 2.80 Same 2.80