Singapore Stock Market Strategy - CIMB Research 2018-04-05: In A World Of T-square ~ Overview & Alpha Picks

Singapore Strategy - CIMB Research 2018-04-05: In A World Of T-square

Singapore Stock Strategy Alpha Picks Trade War SEMBCORP MARINE LTD S51.SI GENTING SINGAPORE PLC G13.SI YONGNAM HOLDINGS LIMITED AXB.SI UOL GROUP LIMITED U14.SI CHINA SUNSINE CHEM HLDGS LTD. CH8.SI MM2 ASIA LTD. 1B0.SI VENTURE CORPORATION LIMITED V03.SI

Singapore Strategy - In A World Of T-square

Our economist assessed pockets of opportunities for Singapore’s exports to benefit from the displacement of demand for US-bound products that compete with China.
In our view, four sectors will see some impact from a US-China trade war:
1. technology,
2. commodities,
3. capital goods, and
4. banks.
But in the near-term, we expect business as usual.
There is no change to our Alpha picks: SMM, VMS, UOL, GENS, STE, AEM, China Sunsine, Yongnam and mm2.

Opportunities for Singapore’s exporters

Based on our economist’s report (Trade tensions escalate with tit-for-tat tariffs), exports from Singapore that compete directly with China for the US market amount to US$5.7bn or 25% of Singapore’s total exports to the US. There are some opportunities for displacement demand as a country, in our view.
These products include automatic data processors, aircraft parts, turbo-jets, propellers and other gas turbines, printing machinery and medicaments Tech, commodities, capital goods and banks may be impacted.
It is almost impossible to quantify the direct impact on listed companies but the perceived impact is more obvious among tech/manufacturing, commodities, capital goods and banks sectors in the tit-for-tat exchanges between China and US in the medium term.

TECH SECTOR: AEM and VMS face lower risk

We assess the tariff on technology/manufacturing companies under our coverage based on their sector exposures (consumer electronics, automotive) and factory locations.
- Memtech, Valuetronics and Sunningdale face moderate risks as they are involved in the consumer electronics and automotive value chain and have heavy presence in China.
- AEM faces low risk, given its status as a sole supplier to a customer.
- VMS is insulated by its minimal presence in China and customer diversification benefits.

COMMODITIES: Wilmar may be impacted

Wilmar and Golden Agri-Resources (little impact) are involved in soybean crushing activities in China.
In FY17, Wilmar's oilseeds and grains division made up 46% of its PBT. Assuming its soybean crush business in China accounted for 60% of its oilseeds and grains PBT and c.35% of its raw material costs for its crushing business comes from US, we estimate that a 25% import tariff on US soybean to China could impact its total PBT by about 10%.

CAPITAL GOODS: Yangzijiang’s cloudier order outlook but lower steel

Singapore yards source their steel from Europe, Japan and China. We believe sweeping tariffs for aluminium and steel may not lead to higher cost of production. Conversely, excess steel inventory in China may soften prices.
Prices of domestic steel coil in China have fallen 7% since early-Mar 18. This could be positive for Yangzijiang, but the impact could be negated by lower demand for iron ore and weaker global trade volumes which in turn reduce the demand for new-build bulk carriers and bulk carrier vessels.

BANKS: Trade flows

Rising trade tensions and potential disruption to trade flows could cast a pall on banks’ cash management and loan activities. We estimate that trade and transaction services accounted for 5% of DBS’s FY17 total income, 2% of OCBC’s and 3% of UOB’s.
A cloudy global and US growth outlook could constrain rising yield curves, or even worse, cause an unfavourable rise in interest rates. At this juncture, we are forecasting +8bp in DBS’s FY18F NIM and +5bp for OCBC’s and UOB’s. As at mid-Mar, our chief economist projects four rate hikes throughout 2018, followed by two in 2019.

ALPHA PICKS

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2018-04-05

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