Singapore Strategy 2016 - CIMB Research 2015-12-09: Sector Preferences and Country Top Picks

Singapore Strategy 2016 - CIMB Research 2015-12-09: Sector Preferences and Country Top Picks class= Singapore Strategy 2016 Sector Preferences Country Top Picks

2016 sector preferences and country top picks 

  • Ahead in 1H16, a US rate hike cycle could depress sentiment. If the S&P500, now back at record highs, stumbles, investment sentiment will look fragile. 
  • In Asia, China and ASEAN are still reeling from a slowdown. The consumer in developing ASEAN is pulling back. The commodity sector is seeing defaults and a reneging of contracts. Banks’ NPLs are bound to be the next to be hit. Investing at this point certainly exposes one to a long list of potential pitfalls. That said, stocks are cheap and we reiterate that one needs a longer-term view for specific catalysts to pan out. 
  • In our opinion, the biggest catalyst for Singapore is the likelihood for it to prosper as an ASEAN hub as AEC, OBOR investments and TPP developments materialise. 

Sector preferences 

■ Overweight banks, property and REITs. 

  • Our Overweight sectors remain banks, property and REITs. Valuations are compelling, largely accounting for known near-term negatives ahead, i.e. rising loan allowances for banks and falling prices and decreasing rents for most property segments as they digest the glut of completed supply entering the market. These sectors are cheap, however, with the only question being what is the catalyst that can drive a mean reversion. We believe that the catalyst is the prosperity of ASEAN as the region becomes more integrated, driven by governments that are more receptive to opening up and fuelled by FDIs from OBOR and TPP. 
  • Singapore banks have multiple angles from which they can benefit. In a 1- to 2-year timeframe. As ASEAN currencies stabilise, we expect to see more local ASEAN consumer/services companies cross borders to attempt to enter new markets because of AEC. Target markets will naturally be the bigger markets of Indonesia or Indochina. Since the banking sector in Indochina is relatively undeveloped, a lot of funding needs will likely be financed by home market banks. A build-out of new manufacturing facilities as MNCs realign the center of gravity of their logistics chains from China to ASEAN also has to be funded by banks. 
  • Lastly, bigger infrastructure building projects could be funded by a combination of Chinese SOEs (under OBOR), Singapore or Malaysian sovereign wealth funds, bank lending and debt papers – all equate to more business for banks. These infrastructure projects can also be subsequently converted into REITs or business trusts. In the longer term, the combination of manufacturing jobs, urbanisation and infrastructure investments has commonly led to a period of high GDP growth and the birth of a middle-class consumer; we see these trends blossoming in ASEAN and Singapore banks will benefit from this. 
  • Singapore developers face a glut of completed supply in residential and office space as well as hotels in Singapore and investors have asked what can revive demand when the Singapore government seems to be content to stick to its macro prudential property measures and restrictive immigration policies. We think the answer lies in the creation of jobs linked to the regionalisation of ASEAN. 
  • In the past decade, Singapore developers have leaned outwards to China, then to Australia in recent years, as opportunities in the home markets dried up. Ahead, we believe development projects in ASEAN will become more attractive, especially if restrictive rules against foreign developers are eased. 

■ Underweight capital goods, gaming and consumer. 

  • Our Underweight sectors are capital goods, gaming and consumer. Capital goods is a concern because yards are running out of jobs while previously-secured jobs are turning out to be hardly cast in stone. Meanwhile, the offshore support sector faces a balance sheet problem. 
  • Valuations are cheap but the propensity for negative surprises will give rise to more downside risks from time to time. The likely development of the GLCs into more infrastructure-dependent companies (vs. yard-dependent) will take time and capex; the benefits of AEC and OBOR hardly look like they will be a catalyst soon. 
  • On gaming, we find GENS’s problems to be as much stock-specific as they are due to the broad disappearance of the Chinese gambler globally. With the Chinese export, property and commodities sectors in the doldrums, we find it difficult to imagine that China will mint new billionaires at a pace similar to the past. It is also difficult to imagine China discarding its anticorruption stance. 
  • On the consumer names, AEC technically opens up new market opportunities for them but such benefits are outweighed by increased competition (from neighbouring markets) and the adverse conditions faced by the ASEAN consumer currently 

Top picks 

  • On the balance of 1) valuations, 2) likelihood of managing near-term headwinds or negative surprises, and 3) the prospect of longer-term positive catalysts if AEC, OBOR and TPP pan out, our large-cap picks are: 

■ Capitaland. 

  • We view the property sector as a key beneficiary, if developing ASEAN prospers and Singapore cements its status as a hub in the region. 
  • Capitaland’s pan-Asian exposure will enable the group to ride the growth of ASEAN and China. Its established REIT platforms will also allow it to recycle mature assets into capital to fund the pursuit of new opportunities. With 75% of its earnings derived from recurring sources, the group has a steadily-growing income base to sustain its long-term ROE targets. 
  • Longer-term development in ASEAN notwithstanding, Capitaland also has nearterm catalysts, such as strong residential sales in Vietnam and a pick-up in sales in China, to support the stock. Its valuation is decent at a 24% discount to RNAV. 

■ City Developments. 

  • Despite a dwindling landbank, City Developments is still one of the best proxies for Singapore property and its most attractive feature now is valuations. 
  • Rental income is underpinned by high portfolio occupancy of 97.3% in Singapore and the upcoming completion of South Beach. An estimated 96% of its office space has been leased, of which 70% have commenced operations. 
  • Valuations are extremely attractive at 0.81x P/BV and a 45% discount to RNAV. We view current valuations as reflective of its lack of domestic opportunities plus heightened selling by key shareholders. 
  • If ASEAN opportunities beckon, the previous monetisation of its Sentosa assets had also freed up capital, which it can deploy. 

■ DBS. 

  • DBS does not have a full ASEAN franchise compared to peers in Singapore and Malaysia. It is not necessarily the best banking franchise to profit from more intra-ASEAN activity as AEC blossoms. 
  • DBS does, however, have: 
    1. Temasek as a shareholder, allowing it to benefit as a key banking partner on regional infrastructure investments, be it in funding Singapore GLCs or China SOEs (OBOR) heading into developing ASEAN, 
    2. a strong debt capital market franchise to support large corporates’ project financing needs, and 
    3. strong treasury capabilities to appeal to US MNCs seeking a banking partner in this region as more MNCs head into ASEAN due to TPP and the need to find low-cost manufacturing centres. 
  • Valuations of 1.0x CY16 P/BV and 9.9x CY16 P/E are attractive against a 2-year ROE of 10.5% (FY16-17), where we pencil in heightened credit costs. 
  • Buying opportunities are present after its recent share price weakness, driven by concerns about its credit cycle. 

■ IHH. 

  • IHH does not play to the AEC, OBOR or TPP trends but it benefits from another structural long-term trend, i.e. that of an ageing population in Singapore and Hong Kong. We view its entry to the Hong Kong market as exciting; we see eventual contributions from Hong Kong potentially matching Singapore’s. The threats to IHH are Singapore’s healthcare costs (high) and the fact that hospitals are setting up regionally to satisfy local demand and to cater to medical tourism. 
  • We believe that some differentiation across geographies still exists and Singapore medical tourism drivers can be intact. In the near term, more favourable currency movements may help, including a stabilisation of the Turkish lira, which will allow operational positives in local currency terms to show through. x 

■ SingPost. 

  • We view SingPost as a beneficiary of the irreversible trend of consumer purchasing patterns migrating from brick-and-mortar outlets to ecommerce. SingPost is less about uncertain M&A-driven growth now and more about driving synergies from its recent acquisitions of two US outfits. 
  • The key to profitability is generating volumes by linking US retailers and consumers, with ASEAN retailers and consumers. In this regard, the lowering of customs restrictions in Indonesia (under AEC) will help. Indonesia joining the TPP will also be helpful. Its valuation of 25.9x CY16 P/E is further supported by a CY16 dividend yield of 3.9%. 

■ Thai Beverage. 

  • The opening up of ASEAN markets will allow the establishment of true regional champions and regional brands. Thai Beverage is slightly ahead of the trends, having put together acquisitions in the past to build a regional distribution platform and a portfolio of brands. The task now is to develop truly regional brands and we see it doing so for Chang as part of its Vision 2020 strategy. 
  • Competition in consumer products is notoriously stiff when markets open up. The company’s edge is the presence of a spirits monopoly, which acts as a cash cow to fund these initiatives. Its valuation of 17.4x CY16 P/E is decent for a budding regional consumer play. 

■ Our best small-cap ideas are 

Kenneth NG CFA CIMB Securities | Singapore Research Team CIMB Securities | http://research.itradecimb.com/ 2015-12-09
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