Singapore Strategy - DBS Research 2016-05-27: MAS eases loan curbs for car loans ~ is property next?

MAS eases loan curbs for car loans - is property next?

MAS surprisingly announced the relaxation on motor financing
Exploring the plausible resultant implications on (i) land transport; (ii) speculation on property measures
Land transport – levels playing field
Property easing moves still premature

The Monetary Authority of Singapore (MAS) has just announced the relaxation of financing loans for vehicles. The maximum loan- to-value for vehicles on the open market less than or equal to S$20,000 will be raised from 60% to 70% while vehicles more than S$20,000 will be raised to 60% from 50%. The maximum loan tenure is also increased to 7 years (from 5 years). These adjustments were said to be on the back of a sustained drop in Certificate of Entitlement (COE) premiums, according to the MAS. We believe the authorities were referring to the COE premiums since 2H15.
The motor loan restrictions were put in place in 2013 to moderate demand for COEs and alleviate inflationary pressures, and to encourage financial prudence.
Arising from this surprising market development, we see plausible resultant implications on two areas : (A) the land transport scene; and, (B) speculation on flow through to property measures.

This change in financing for vehicles should level the playing field and lessen the attractiveness of financing a car through Uber arranged dealership. Currently, Uber has a financing scheme that allows consumers to finance up to 80% of the car’s price, provided the car is registered under a company name and under a scheme that offers paid rides.
We believe this was done to enable the car buyer to eventually provide private car hire services. With the narrowing financing gap, this could potentially slow the growth of pool of private hire cars.

With the easing of financing, the resultant impact on COE prices remains to be seen on the back of an increased crop of supply. In the event of higher COE prices (given increased demand), we believe this could put private car hire players off to bid for COEs to grow their fleet. If this happens, it could reduce competitive pressures and concerns that private-hire car companies are growing their fleet aggressively and edging taxi companies out.

We maintain our positive view on CD as we expect growth to be above average on the back of lower oil prices (compared to last year, notwithstanding that oil prices are at YTD highs), coupled with margin expansion as it transits into the new Bus Contracting Model.
While the market may be disappointed on the absence of one-time gains from disposal of its bus assets (which has always been our view), we believe capex for new buses will be funded by the government, which is positive as it raises the group’s free cash flow, providing upside for increased dividend payout.

Leading on from the above developments on easing for motor financing, we believe that the market could turn to speculate about a potential relaxation of government property loan curbs again, which we believe is pre-mature. To recap, back in 2013, as part of a series of measures, MAS lowered loan-to- value (LTVs) for first homes (80% LTV), second homes (50% LTV from 60%) and for third homes (40% LTV from 60% previously). The total debt financing ratio framework (TDSR) was also put in place and we believe it will remain for the following reasons.
Firstly, we note that prices, measured by the Property Price Index (PPI) is down 9.4% from the peak, which is hardly a correction. Secondly, the government has maintained in recent updates that the property market continues to see a modest, controlled decline in prices given that prices still remain close to 40% above the lows seen in 2009, while income growth has lagged that. This is especially when interest rates remain low and any policy relaxation could result in an unintended rise in prices.

We believe that any tinkering is likely to come on the back of a further drop in prices, close to the tune of 13%-15% (in line with previous policy reversal) or any systemic risk seen in the economy. A plausible time for this, in our view, is the end of 2016 or 1H17.

We believe that the perceived policy loosening stance by the government will boost sentiment for developers who have been trading in a range close to 0.7x P/NAV (near the GFC lows) under the weight of a weak operating environment. Among developers, City Developments (BUY, TP S$9.60) has the largest exposure to the Singapore residential market at 27% of its RNAV. Other developers with a high portion of RNAV exposed to the Singapore residential market are Wheelock and Wing Tai.
Our picks are CapitaLand (CAPL) and UOL group (UOL) for its diversified and high recurring earnings profile.

Derek TAN DBS Vickers | Andy SIM CFA DBS Vickers | http://www.dbsvickers.com/ 2016-05-27

BUY Maintain BUY 3.23 Same 3.23

BUY Maintain BUY 3.70 Same 3.70