Investment Highlights

• We maintain BUY on IOI Properties Group (IOIPG) with a lower fair value of RM1.42/share from RM1.52/share based on a higher discount rate of 60% (from 55% previously) to our revised RNAV and a neutral ESG rating of 3 stars (Exhibits 7 & 8). Our higher discount rate is to reflect current weaker sentiments in China’s property market.

• IOIPG’s 1QFY23 core net profit (CNP) of RM205mil came in largely within expectations, making up 27% of our FY23F earnings and 28% of consensus estimate. Hence, we made no changes to our forecasts.

• YoY, the group’s 1QFY23 revenue surged 60%, which supported the CNP increase of 66%. This was mainly attributed to stronger contribution from property development (+46% YoY) and property investment (+86% YoY) (Exhibit 2). The improvement was contributed by higher property sales and commencement of recurring lease income from IOI City Mall Phase 2 on 25 August 2022.

• In 1QFY23, IOIPG has secured new sales of RM449mil (+52% YoY), attaining 21% of its FY23F sales target of RM2.1bil (Exhibit 3). New sales were contributed largely by Malaysia (79%), with the remainder from China (15%) and Singapore (6%).

• The stronger YoY sales were attributed to higher 1QFY23 launches of RM175mil vs. RM25mil in 1QFY22. 80% of IOIPG’s 1QFY23 launches stemmed from Xiamen 2 and 3 projects, while the remainder were from Bandar IOI Segamat (13%) and Bandar Puteri Puchong (6%).

• In FY23F, IOIPG plans to launch properties worth RM1.5bil, mainly in its existing townships in Malaysia.

• Meanwhile, the group’s unbilled sales dropped 31% YoY to RM501mil, which represented a cover ratio of only 0.2x of FY23F revenue. Despite the low cover ratio, we believe IOIPG’s FY23F revenue and CNP will mainly be supported by the group’s efforts to monetise its existing inventory (Exhibit 4).

• QoQ, the group’s 1QFY23 CNP improved 9%, mainly due to lower tax expenses (-51% QoQ). The decline in effective tax rate of 7% in 1QFY23 vs. 25% in 4QFY22 was mainly driven by utilisation of tax losses by its China operations and lower taxes recognised on revaluation gains of investment properties of RM470mil, after applying real property gains tax rate (RPGT).

• The property sector in China is still adversely impacted by its strict zero-Covid policy. We are concerned about the sales of IOIPG’s ongoing projects in China given the 26% YoY slump in China’s residential property sales for January–October 2022 (Exhibit 6). Nevertheless, the Chinese government recently unveiled a broad set of policy initiatives to support the property sector. These measures include credit and financial support to ensure the completion and handover of projects to homeowners and homebuyers.

• In August 2022, the People’s Bank of China lowered the 5-year loan prime rate (LPR) by 0.15% to 4.30% and the 1- year LPR to 3.65% from 3.70% to boost the property market (Exhibit 5). Notably, the 1-year LPR serves as the reference rate for the majority of new loans in China. Despite the government’s support for the property sector and easing of monetary policy, we remain cautious on China’s property market due to fragile demand currently.

• The stock currently trades at a bargain FY23F PE of only 7x vs. a 4-year average of 11x. We continue to like IOIPG for its:
  1) regional property development portfolio with a strong track record and successful real estate projects in Malaysia, Singapore (Sentosa Cove) and China (Xiamen); and
  2) resilient earnings amid a prolonged property sector downturn underpinned by recurring sales from predominantly owner-occupier home buyers in established and highly sought-after township projects, particularly, Bandar Puteri Puchong and Bandar Puchong Jaya.

Source: AmInvest Research - 24 Nov 2022