Singapore Strategy - CIMB Research 2017-02-09: Pioneers of the next generation

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SINGAPORE STOCKS Committee of Future Economy CFE Report SINGAPORE POST LIMITED S08.SI SINGAPORE TECH ENGINEERING LTD S63.SI VENTURE CORPORATION LIMITED V03.SI

Singapore Strategy - Pioneers of the next generation

• Review of the tax structure’s competitiveness is probably the only new thing that we gleaned from the paper published by the Committee of Future Economy (CFE).
• Finance, hub services, logistics, urban solutions, scalable healthcare technology, ICT, real estate and advanced manufacturing are key growth areas.
• Direct beneficiaries: ST Engineering, Keppel TT, Keppel DC REIT, Venture Corp, Mapletree Logistics Trust, SingPost, SATS and Genting.

Seven strategies for the next 5-10 years

• The CFE, led by Singapore’s Minister of Finance and Minister of Trade and Industry published a comprehensive report with recommendations to guide Singapore’s economic strategy in the next 5-10 years. This is not the first time Singapore has done such a review (the last one was carried out in 2010).
• CFE listed seven motherhood strategies: 
  1. deepen international connections, 
  2. acquire and utilise deep skills, 
  3. strengthen enterprise innovation and scalability, 
  4. build strong digital capabilities, 
  5. develop a vibrant and connected city, 
  6. develop industry transformation maps and 
  7. set up trade associations and chambers’ partnerships. 
• More details are likely to be shared in the 2017 budget on 20 Feb.

What’s worth noting in the 143 page report?

• Most of the recommendations are already being implemented or in the pipeline. A few growth sectors mentioned include finance (fintech), hub services, logistics, urban solutions, scalable healthcare technology, information communication technology (ICT) and media, real estate and advanced manufacturing. 
• We highlight a few points worth nothing and the potential impact on stocks.
  • More capital needed. The CFE recommended the government simplify the regulatory framework for Venture Capitals (VC), in particular, the authorisation process for VC managers, as well as encourage Private Equity (PE) firms to be based in Singapore. This could be a step to cultivate the lacklustre equity market and address the dearth of IPO pipelines.
  • Technology and innovation. Smart Nation vision is not new and we see heightened demand for data centres, data analytics, ICT and cybersecurity in a highly digitalised economy. Key beneficiaries: STE’s electronics, KTT and KDC REIT. Venture, CEI could monetise the healthcare technology and advanced manufacturing trends.
  • More connectivity. SATS and Genting Singapore to benefit from more international connections – Terminal 5, seaport in Tuas and KL-Singapore High Speed Rail.
  • Logistics is in, industrials and retail are out. Logistics is a key sector to tap on Asia’s rising middle class and the growth of e-commerce. Singpost, MLT (40% portfolio in Singapore) are two names we like in the space. Conversely, retail sector and industrials need to acquire new capabilities and upgrade skills. We have a Neutral call on the capital goods and retail REITs.
  • Review of tax system. The tax system should remain broad-based, progressive, and fair. It should be more competitive and pro-growth. Having one of the lowest corporate tax rates (17%) in Asia (average: 22%), we doubt there will be significant tax cuts for the corporates but we expect more tax breaks to tide us over the challenging environment in the short-term.
  • 2-3% average growth in the next 10 years. Again, nothing new here. We believe the upside of this guidance is still very much dependent on the global economy.

Highlighted companies

Singapore Post Ltd

• ADD, TP S$1.76, S$1.47 close.
• SPOST intends to expand and enhance its e- commerce logistics capabilities in ASEAN, Australia and New Zealand. The backing of Alibaba and Lazada should also help increase volumes quickly. Our TP is based on DCF valuation (7% WACC).

ST Engineering

• ADD, TP S$3.75, S$3.33 close.
• ST Engineering’s subsidiary STE Electronics is a leader in ICT and cybersecurity. The division makes up c.30% of its CY17F PBT. Our TP is based on blended valuations (P/E, DCF and dividend yield). STE’s net cash (including investments in bonds) stood at S$262m.

Venture Corporation

• ADD, TP S$10.94, S$10.29 close.
• Medtech, life sciences and 3D printing are the new opportunities that Venture is pursuing. Test & Measurement segment has grown from 28% of revenue in 1Q13 to 44% of revenue in 3Q16. Our TP is based on 14.4x FY18F P/E.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-02-09

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