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

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EZION HOLDINGS LIMITED 5ME.SI SEMBCORP INDUSTRIES LTD U96.SI SINGAPORE TECH ENGINEERING LTD S63.SI SHENG SIONG GROUP LTD OV8.SI

Strategy - Four themes to ride this cycle

Theme 4: Survival of the fittest

• 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.

Ezion Holdings (EZI SP) : BUY; TP: S$0.85

Analyst: Pei Hwa HO

Challenges

1. Low oil prices have dampened oil and gas activities and demand for offshore support vessels.
2. Rate reduction and early termination take a toll on profitability and expansion plans.
3. Slow paying receivables and loss of income from vessels taken off operating fleet for repair/upgrade/conversion could potentially jeopardise cash flow.

Strategy to overcome challenges

1. Think out of the box. Ezion is one of the first companies to introduce the use of liftboats in Asia and the Middle East. Management’s bold move into this relatively new asset class in the region has created an economic moat that will keep Ezion ahead of potential competition when oil prices and demand pick up. The cost efficient liftboat is among the handful bright spots in current low oil price environment, which emphasises a lot on cost reduction.
2. Innovative financing + prudent business model. Ezion’s financially-savvy management has been very innovative and creative in terms of funding through joint-ownership, PERPs, sales and leaseback etc, allowing rapid fleet expansion. Meanwhile, expansion has been backed by long-term charter contracts, which provides revenue visibility. This is also one of the key contributing factors to Ezion’s outperformance in the recent oil crisis.
3. Diversification into offshore windfarm industry. As rate reduction pressure and cancellation risks were building up, Ezion took proactive measures to redeploy some of the service rigs to support offshore windfarms and convert some units into Mobile Offshore Production Units (MOPUs). Ezion is expected to redeploy 3-6 units out of total fleet of 37 service rigs for windfarm projects in the next 2-years. We estimate that China could require 25-30 liftboats to meet its target of installing 27.5GW wind capacity over the next five years or 5.5GW per year.

ST Engineering (STE SP) : BUY; TP: S$3.55

Analyst: Suvro SARKAR

Challenges

1. Slow growth in traditional heavy maintenance business for Aerospace division amid lengthening maintenance cycles of new aircraft
2. Possibility of long drawn slowdown in shipbuilding as the traditional shipping sector has been plagued by overcapacity for some time now, while the slide in oil prices also affects demand for offshore vessels.
3. Slowing demand for commercial vehicles in China as economy transitions

Strategy to overcome challenges

1. Focus on electronics division as the main growth driver to offset weakness from the shipbuilding and commercial vehicle divisions. Electronics division, with its strong track record and capabilities, will benefit from the focus on building smart cities, not only in Singapore, but across the region as well. ST Electronics is also aiming to be a significant emerging player in the global space industry and can offer satellite imagery and value-added services to customers worldwide after launching its first satellite in December 2015.
2. Diversifying capabilities in aerospace division to expand focus on cabin reconfiguration and aircraft interiors projects in both key markets of US and Asia. Investing in European facility with Airbus to come up with new range of passenger to freighter products for A330 and A320 family aircraft.
3. Leverage defence technologies for commercial solutions. The group has extensive knowhow in the defence space owing to its long history as a defence contractor and it is actively investing in R&D to develop commercial applications e.g. transportation solutions using these technologies.
4. The group continues to be “AAA” rated by Moody’s and S&P and maintains strong cash position (including investments). Leveraging this strong balance sheet for M&A activities across its various divisions to plug gaps in products and markets is a key component of management strategy.

Track record:

• ST Engineering has maintained profitability and dividends at steady level despite the ups and downs in global economy, as evident from the charts below. The group’s orderbook of S$11.7bn remains relatively stable and covers slightly less than two years of revenue, securing decent visibility going forward, despite a slowdown in Marine and Land division orders in 2015. 
• We believe ST Engineering will be able to maintain steady earnings and dividends in the near term, and keep its status as a safe haven dividend play amidst volatile market conditions.

Sembcorp Industries (SCI SP) : BUY; TP: S$3.10

Analyst: Janice CHUA / Pei Hwa HO

Challenges

1. Intensifying competition in the Singapore power market resulting from the over-commitment of LNG purchases on take-or-pay basis and full market liberalisation taking place by 2018.
2. Managing higher execution risks in emerging markets.

Strategy to overcome challenges

1. Globalisation. Sembcorp Industries (SCI) took the plunge and embarked on its global expansion strategy in 2003 for sustainable long-term growth and market diversification, and has accelerated its pace since 2010. This has proven to be a brilliant move. Today, overseas operations are contributing to nearly two-thirds of utility profits.
2. Risk management in emerging markets. Through a decade of overseas expansion experience, SCI has developed a risk management framework that minimises risks in both developed and developing countries. This was demonstrated by the successful commencement of its first India power plant in 2015, with “reasonable” deviation of <1 year from its first completion target date set in 2011, considering the complexity of operating in India.
3. Capability to build greenfield plants. SCI’s core competency in EPCC of greenfield plants offers distinctive competitive advantages, as greenfield projects typically cost less than the acquisition of brownfield projects. In addition, this ensures the quality of facilities as well.

Sheng Siong Group (SSG SP) : BUY; TP: S$1.04

Analyst: Alfie YEO

Challenges

1. Low industry growth environment in Singapore’s developed modern grocery retail market
2. Growth limited to Singapore as it has little or no overseas presence to supplement growth
3. Continuing competition from key competitors, DFI and NTUC Fairprice

Strategy to overcome challenges

1. Seeks to achieve more operational efficiencies to leverage on economies of scale to reduce fixed costs and improve margins. Logistical, manpower, direct sourcing, store rental arrangements can be optimally managed to extract further cost savings that will improve operating margins and ROE for earnings to outperform peers. Its initiatives include implementing self payment systems across its stores which will reduce manpower costs over the longer term. It will continue to expand into locations it is not present in. Development of existing and new HDB towns will provide opportunities for store network growth.
2. Looking to grow in Kunming, China. SSG recently signed a lease for one property to operate a supermarket, which will open in 2H16. It plans to have more stores in the city once the first store proves to be successful in Kunming.
3. Continues to offer pricing and selection value to customers. SSG prices its products at a slight discount to its direct competitor NTUC Fairprice. It offers a wider selection of quality fresh food items. Loyalty programmes including lucky draws and its flagship Sheng Siong variety show will continue to promote customer loyalty. SSG also has an online presence to better position itself to capture the online MGR segment. It has higher leverage on its logistical resources to service online customers than internet payers like Redmart.

Since starting its very first store at Ang Mo Kio in 1983, Sheng Siong has grown its market share from 0% to 18% in the Singapore supermarket space. This is despite going against MGR giants DFI and NTUC Fairprice, who were both operating as an almost duopoly in the segment.

READ ALSO:

• Singapore Strategy - DBS Research 2016-06-14: Bumpy road up
• Theme 1 of 4 ~ Singapore hospitality nearing a bottom
• Theme 2 of 4 ~ Growth at reasonable pricing
• Theme 3 of 4 ~ Sustainable yields
• Theme 4 of 4 ~ Survival of the fittest
• Theme 4 of 4 ~ Survival of the fittest (Cont')

Janice CHUA DBS Vickers | YEO Kee Yan DBS Vickers | LING Lee Keng DBS Vickers | http://www.dbsvickers.com/ 2016-06-14

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