Singapore Strategy - DBS Research 2016-06-14: Theme 4 of 4 ~ Survival of the fittest (Cont')

Singapore Strategy - DBS Research 2016-06-14: Theme 4 of 4 ~ Survival of the fittest SINGAPORE AIRLINES LTD C6L.SI YANGZIJIANG SHIPBLDG HLDGS LTD B56.SI SATS LTD S58.SI

Strategy - Four themes to ride this cycle

Theme 4: Survival of the fittest (Continue)

  • Amid a challenging operating environment, we look for companies which have a solid strategy and good management track record to overcome ongoing challenges in their respective fields. We believe these companies will overcome and emerge stronger in the next cycle. (Continue)

Singapore Airlines (SIA SP): BUY; TP: S$12.50

Analyst: Paul YONG


  • Low growth in its mature home market of Singapore
  • Eroding market share from Low Cost Carriers
  • Intense competition from other premium airlines such as the Middle East carriers

Strategy to overcome challenges

  • Multi-hub strategy -> investing in joint ventures or associates with hubs in other regions. E.g. Vistara in India (49%), nokScoot (49%) in Thailand and to some extent Virgin Australia (20% stake) to tap on higher growth regions. These associates help expand destinations served by SIA Group from 122 to 176.
  • Portfolio strategy to enhance connectivity and extend market share. Wholly owned subsidiaries Silkair, Scoot and Tigerair help boost its market share in Singapore and also drive passenger carriage growth. Synergies post Tigerair acquisition to drive margin expansion.
  • Continued investment into new planes, products (premium economy, new seats, new lounges, new apps, new food options etc) to maintain its premium position and stay ahead of the competition.
SIA has never lost money for a full financial year in its entire history as a listed company, even through SARs, 9/11, the AFC and the GFC.

Yangzijiang Shipbuilding (YZJSGD SP) : BUY; TP: S$1.25

Analyst: Pei Hwa HO


  1. Unfavourable macro backdrop with prolonged downturn in the sector dragged by over expansion in shipbuilding capacity in China during the 2007-2008 super boom.
  2. Keen competition and sluggish order flows have led to margin contraction and weaker payment terms. Staying competitive and replenishing order backlog at decent newbuild prices are increasingly challenging.
  3. Attractive M&A opportunities that complement its core shipbuilding business to drive inorganic growth are hard to come by.

Strategy to overcome challenges

  1. Solid management team. Executive Chairman Mr Ren Yuanlin is a highly regarded shipyard manager with the ability to time the market and move ahead of peers.
    • Yangzijiang turned away unprofitable newbuild orders in 2012. This allowed them to capture the upswing of newbuild orders and prices in 2013.
    • Yangzijiang “jumped off” the offshore bandwagon after one attempt to construct a jackup rig as execution risk, and intense competition outweighed the growth potential.
  2. Project management and cost control are key differentiating factors.
    • The first two units of mega containerships are currently being built at the existing yard facilities to minimise technical hiccups, and trained workers will then be transferred to the new Xinfu yard to continue the construction on the other mega ships.
    • Yangzijiang has proven to be one of the most cost efficient and productive Chinese shipbuilders with 5-10ppt cost advantage over peers.
  3. Moving up the value chain. Yangzijiang has a strong emphasis on R&D and is constantly moving up the value chain into more sophisticated vessels i.e. mega containerships, LNG carriers etc.
    • Yangzijiang was the first Chinese yard to clinch mega containership orders in mid-2011; the first 10k TEU containership was successfully delivered to Seaspan on time and within budget in Mar-2014.
    • Secure 25 units of 10k TEU containerships and 8 units of 11.8k TEU containerships within a short span of 5-years, as well as the first two units of LNG carriers and two units of VLGC vessels in 2015 are testimony to Yangzijiang’s track record and capability.

SATS Ltd (SATS SP) : HOLD; TP: S$4.18

Analyst: Alfie YEO


  1. Low growth in its mature home market of Singapore
  2. Operates in a government regulated and controlled environment which limits scope to expand regionally
  3. Rising staff costs have been putting pressure on operating profit

Strategy to overcome challenges

  1. Adopting a strategy to improve productivity and scale regionally. SATS has been investing in automation in a bid to improve output per unit of labour. It will scale up its operations into a bigger regional footprint to enhance connectivity. Technological investments seek to bring more value to customers as it connects its services across its operations in Asia. This also alleviates pressure on rising staff costs. Recent restructuring of low margin businesses such as BRF and staff costs reduction has provided temporal relief to narrowing margins. Nonetheless, initiatives to improve operating scale if well executed should improve margins over the longer term
  2. While SATS cannot wholly acquire or solely operate ground handling services in overseas markets due to government restrictions and licensing, it continues to expand regionally by taking stakes in overseas ground handlers. Recent developments to increase scale have included co-operation and expansion with various food companies, flight kitchens and ground handlers. It has continued to expand its stakes overseas through Malaysia’s Brahims, Oman Air’s cargo handling services and Philippines’ MacroAsia Catering Services. It is also maximising its kitchen capacities through partnerships with BRF in Singapore and Wilmar in China. The partnership with DFASS targets to uplift connectivity with passengers through provision of travel retail services.

Janice CHUA DBS Vickers | YEO Kee Yan DBS Vickers | LING Lee Keng DBS Vickers | http://www.dbsvickers.com/ 2016-06-14
BUY Maintain BUY 12.50 Same 12.50
BUY Maintain BUY 1.25 Same 1.25
HOLD Maintain HOLD 4.18 Same 4.18