Singapore Property - Maybank Kim Eng Research 2015-10-05: Can developer stocks rally when home prices are falling?

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Singapore Property WING TAI HLDGS LTD W05.SI  HO BEE LAND LIMITED H13.SI  CAPITALAND LIMITED C31.SI  OUE LIMITED LJ3.SI  CITY DEVELOPMENTS LIMITED C09.SI 

Singapore Property Can developer stocks rally when home prices are falling? 

• We think yes. Home sales volume can be a bigger driver of developer stocks than home prices. 
• Sector re-rated in 4Q01 despite a sharp 4.3% decline in home prices. Sales volume increase of 43% and lifting of cooling measures the likely reasons. 
• Maintain OVERWEIGHT on developers. Sector past the worst of policy tightening. We expect the government to start rolling back cooling measures in 2016 and see it as a rerating catalyst. 

Developer stocks can rally in times of falling home prices 

• We believe developer stocks can still rally despite the dire home price outlook over the next few years. In fact, this occurred in 15 out of the 31 quarters of home price contraction since 4Q97. Nine of these 15 quarters of stock rallies were accompanied by higher home sales volume. 
• We used CDL as a proxy to developer stock prices. In times of falling home prices, we believe that developers’ ability to move inventory becomes an important stock driver. For example, in 4Q01, CDL’s share price increased by 44.7% even as home prices contracted by a significant 4.3%. We believe this is driven by the 43.0% jump in home sales volume and a series of offbudget measures introduced by the government to reverse cooling measures implemented over the years. 
• We could see a similar situation in 2016. Home sales volume has a higher correlation to stock prices than home prices. Hence, while home price changes are often used as an indicator for developer stocks, we argue that home sales volume can be a bigger driver at different parts of the market cycle. 
• Given the lacklustre sales volume in the market, we opine that a volume rebound driven by a potential lifting of cooling measures next year could be a rerating catalyst. 

Off budget measures to support property sector in Oct 2001: 

 Government land sales. 

• The government withheld the launch of the last four sites in the confirmed list of 2H01 GLS programme and suspended the sales of residential and commercial sites for 2002. They were moved to the reserve list. 

 Reversed anti-speculative measures on property. 

• It reversed two anti-speculative measures introduced at the peak of the property boom in 1996: 
  1.  capital gains tax on property sold within 3 years of purchase, 
  2.  restrictions on foreigners borrowing in SGD to finance property purchases. 

 Property tax exemption. 

• It exempted property tax for land under development for two years. 

What to do with developer stocks? 

• While regulatory overhang continues to weigh on near term sentiment, we reiterate that Singapore’s property market is past the worst of policy intervention and believe the government could start to roll back cooling measures in 2016. Better affordability and normalisation of interest rates are the key triggers. 
• While change in measures will not arrest home price declines, it should bring a rebound in sales volume and remove a key overhang developer stocks. We believe the 4Q00 rally in developer stocks is a good guide. With our universe trading at a 48% discount to RNAV and 0.59x P/BV, we continue to see good value and skewed risk-reward ratio. Maintain OVERWEIGHT.

Investment theses for individual developers

Wing Tai BUY TP2.25 

• Best proxy for potential lifting of cooling measures. Residential projects account for 60% of asset value. 
• Even if cooling measures are not rolled back, company may consider privatisation, to avoid paying QC penalties. 
• Holds 33.5% of Wing Tai Properties that is conservatively valued at market price. Only implies 0.3x P/BV despite solid fundamentals. 
• Trading at steep discount to RNAV vs 19% in recent privatisation offers. 
• Valuation: 35% discount to RNAV of SGD3.44, consistent with our discount for Ho Bee. 
• Risks to TP: 
  1. lower-than-expected residential ASPs; 
  2. high-end properties remain in doldrums. 
• Catalysts: 
  1. rebound in high-end sentiment; 
  2. privatisation to avoid QC penalties. 

Ho Bee Land BUY TP3.05 

• Low-risk exposure to high end. 
• May benefit from rebound in high-end sentiment. Alternatively, unsold units can be leased out as it faces no time pressure to sell due to QC exemptions. 
• Income-producing offices at more than 60% of its asset value. Steep discount to RNAV unwarranted. 
• Valuation: 35% discount to RNAV of SGD4.71, similar to our discount for Wing Tai. 
• Risks to TP: 
  1. office asset devaluation; 
  2. sentiment on Sentosa properties stays lethargic.  
• Catalysts: 
  1. rebound in high-end sentiment; 
  2. sale of investment assets. 

City Developments BUY TP11.25 

• New platforms for sourcing funds may unlock portfolio value, providing upside to NAV. 
• Ample inventories to capitalise on any upturn in high-end sentiment. 
• Diversification to other markets in recent years could underpin medium-term growth. 
• Valuation: 15% discount to RNAV of SGD13.24, similar to our discount for CapitaLand. 
• Risks to TP: 
  1.  lower-than-expected residential ASPs; 
  2.  market value of M&C; 
  3.  decline in asset values for investment properties. 
• Catalyst: unlocks asset value with new financial platforms. 

CapitaLand BUY TP3.95 

• Offers stability with diversity. Assets spread across Singapore/China. 
• More than 70% of assets produce recurring income. 
• Recognition of pre-sold homes in China to power earnings in the year ahead. 
• Valuation: 15% discount to RNAV of SGD4.64, similar to our discount for City Developments. 
• Risks to TP: 
  1. lower-than-expected residential ASPs; 
  2. decline in asset values for investment properties. 
• Catalyst: rebound in buying sentiment in Singapore and China. 

OUE HOLD TP1.92 

• Good value at wide discount to RNAV. 
• 84% unsold Twin Peaks may benefit from turn in high-end sentiment. Not a privatisation candidate given Indonesian parentage. 
• But with more than 80% of GAV backed by stable non-trading portfolio, we see strong valuation support. 
• Valuation: 50% discount to RNAV of SGD3.85, larger discount than for Wing Tai and Ho Bee due to its riskier profile. 
• Risks to TP: 
  1. decline in asset values for office portfolio; 
  2. lower-than-expected residential ASPs. 
• Catalysts: 
  1. rebound in high-end sentiment; 
  2. divestment of assets at favourable prices to REITs.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2015-10-06

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 2.25 Same 2.25

BUY Maintain BUY 3.05 Same 3.05

BUY Maintain BUY 3.95 Same 3.95

HOLD Maintain HOLD 1.92 Same 1.92

BUY Maintain BUY 11.25 Same 11.25