Good Morning,
Property stocks are trading near undeserving crisis valuations (1.46SD below mean). Analysis of the peak and trough P/B valuations implies an attractive 7:1 reward-to-risk proposition. Our stress test factoring in an unlikely 50% drop in capital values still shows deep value for the developers. We believe the market has over-discounted the negative prospects and maintain OVERWEIGHT on the sector with CapitaLand and Wing Tai are our top picks. Key re-rating catalyst will be demand-side policy easing by the government. Key highlights are as follows. Do let us know in case you need any further details.
Warm Regards,
Vikrant
Ph: 6590 6623
Property: Surviving The Burn-down Analysis
Analyst: Vikrant Pandey/ Derek Chang : (65) 6590 6623 / 6590 6614
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 the historical discount to long-term RNAV of 13.6% implies 55% upside.
Property Sector (Discount)/Premium to RNAV 
· 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:
a) 50% decline in ASPs of residential properties from 2013's peak.
b) 50% decline in capital values of commercial and retail properties in Singapore.
c) 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.
RNAV stress Test
| CAPL | CDL | GUOL | HOBEE | OUE | WINGT | ||
| Share Price (S$) | 2.73 | 8.25 | 1.95 | 1.935 | 1.83 | 1.6 | |
| RNAV (S$) | 5.11 | 13.55 | 3.4 | 3.81 | 4.3 | 3.56 | |
| Assumptions | Decline from peak end 2013 (%) | ||||||
| Singapore residential | (50) | (3.1) | (16.0) | (11.2) | (4.0) | (4.8) | (18.0) |
| Singapore office | (50) | (4.9) | (9.0) | (7.0) | (19.0) | (20.0) | (7.0) |
| Singapore retail | (50) | (8.2) | (4.5) | (1.0) | (0.5) | (4.0) | (2.0) |
| Overseas (including others) | (50) | (26.4) | (13.2) | (22.4) | (20.4) | (16.0) | (14.8) |
| Total | (42.6) | (42.7) | (41.6) | (43.9) | (44.8) | (41.8) | |
| Stressed RNAV(S$) | 2.93 | 7.76 | 1.99 | 2.14 | 2.37 | 2.07 | |
| Upside to Share Price (%) | 7 | (6) | 2 | 10 | 30 | 29 | |
Source: UOB Kay Hian
· Analysis of the peak and trough P/B valuations implies an attractive risk-to-reward proposition of 7:1. Analysis of past P/B peaks and troughs indicates an attractive upside of 203% vs downside risk of 30%.
P/B Valuation
| UpCycle | Upside | DownCycle | Downside | Upside to | |||||||
| Price | BV ps | Current | LT Avg | Upside | Peak Avg | to Curr | Trough | from Curr | Downside | ||
| Company | Ticker | 7 Sep 15 | (S$) | P/B | P/B | from Curr P/B | P/B* | P/B | P/B** | P/B | Ratio |
| (S$) | (x) | (x) | (%) | (x) | (%) | (x) | (%) | (x) | |||
| CapitaLand | CAPL SP | 2.73 | 4.04 | 0.68 | 1.18 | 74.3 | 2.15 | 217.8 | 0.43 | (35.6) | 6.1 |
| City Devt | CIT SP | 8.25 | 9.36 | 0.88 | 2.11 | 139.4 | 2.71 | 207.1 | 0.76 | (13.3) | 15.6 |
| Guocoland | GUOL SP | 1.95 | 2.32 | 0.84 | 1.06 | 26.0 | 1.83 | 118.3 | 0.28 | (66.7) | 1.8 |
| Ho Bee | HOBEE SP | 1.935 | 3.70 | 0.52 | 0.88 | 67.9 | 1.88 | 259.4 | 0.32 | (39.6) | 6.6 |
| Wheelock | WP SP | 1.495 | 2.62 | 0.57 | 1.15 | 100.8 | 1.62 | 183.0 | 0.57 | (0.7) | 251.6 |
| Wing Tai | WINGT SP | 1.60 | 4.00 | 0.40 | 0.96 | 139.6 | 1.38 | 243.7 | 0.32 | (20.8) | 11.7 |
| Average | 0.65 | 1.22 | 90.2 | 1.93 | 203.1 | 0.45 | (29.9) |
· 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.
This transmission has been issued by a member of the UOB Kay Hian Group for the information of the addressee only and should not be reproduced and/or distributed to any other person. Each page attached hereto must be read in conjunction with any disclaimer which forms part of it. Unless otherwise stated, this transmission is neither an offer nor the solicitation of an offer to sell or purchase any investment. Its comments are based on information obtained from sources believed to be reliable but UOB Kay Hian Group makes no representations and accepts no responsibility or liability as to its completeness or accuracy.
