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Singapore Stock Market Strategy - CIMB Research 2018-04-05: In A World Of T-square ~ Tech Manufacturing, Commodities, Chemicals, Capital Goods

Singapore Strategy - CIMB Research 2018-04-05: In A World Of T-square Singapore Tech Manufacturing Stocks US-China Trade War VENTURE CORPORATION LIMITED V03.SI MEMTECH INTERNATIONAL LTD BOL.SI VALUETRONICS HOLDINGS LIMITED BN2.SI UMS HOLDINGS LIMITED 558.SI SUNNINGDALE TECH LTD BHQ.SI WILMAR INTERNATIONAL LIMITED F34.SI YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI GOLDEN AGRI-RESOURCES LTD E5H.SI CHINA SUNSINE CHEM HLDGS LTD. CH8.SI

Singapore Strategy - In A World Of T-square

  • We think sentiment would be affected in the short term, while the market is still bracing for further sanctions in the coming weeks, including
    1. measures to address investments by China in ‘sensitive’ industries or technologies, and
    2. whether to label China a currency manipulator.
  • 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 & MANUFACTURING

  • We opine that the tariffs, if applied, may not severely impact the SGX-listed tech-related manufacturers. Generally speaking, consumer IT products assembled in China will become more expensive for US buyers, in particular. 
  • We assess the medium-term impact from the trade war on tech companies under our coverage based on the following:
    1. Consumer electronics exposure. Only plastic injection moulding companies (such as Memtech and Sunningdale) have meaningful exposure to consumer electronics .
    2. Automotive industry exposure. Valuetronics, Memtech and Sunningdale are involved in the value chain.
    3. Location of production facilities. Companies with production facilities located solely in China should have less leeway to respond to the potential impact of the tariffs than those with a diversified manufacturing footprint.
  • Bear in mind also that Singapore has a Free Trade Agreement with the US, making it more complicated to assess the overall impact on certain companies.

AEM Holdings Ltd (AEM SP) - low risk 


UMS Holdings Ltd (UMSH SP) - low risk 

  • UMS’s major customer, Applied Materials, is a leading front-end semiconductor equipment supplier. We believe the US trade tariffs, if imposed, will have no immediate direct impact on UMS as:
    1. Applied Material has no manufacturing presence in China, and
    2. UMS’s main manufacturing presence is in Penang, Malaysia.
  • The bigger threat to UMS is from potentially higher aluminium prices. Aluminium is the key raw material used by UMS. The US has slapped a 10% tariff on aluminium imports into the country. If this move eventually leads to higher aluminium prices, UMS may need to renegotiate pricing terms with its key customer if it uses specialised aluminium made in the US. 
  • In the short-term, we do not think UMS will see any negative impact as the company has already built up its inventory levels for FY18 and recently announced the acquisition of a 70%-stake in an aluminium alloy producer to UMS.
  • Maintain ADD call and Target Price of S$1.31, based on 2.95x FY18F P/BV. 
  • The company was in a net cash position as at end-Dec 17 while its 3.0Scts final DPS should provide some share price support.
  • UMS HOLDINGS LIMITED (558.SI)  UMS Holdings Share Price  UMS Holdings Target Price  UMS Holdings Analyst Reports  UMS Holdings Corporate Actions  UMS Holdings Announcements  UMS Holdings Latest News  UMS Holdings Blog Articles

Venture Corporation Ltd (VMS SP) – low risk 

  • If we consider Venture’s classification of printing and imaging and computer peripherals and data storage as consumer products, then only 8% of its FY17 revenue will have any relation to consumer products. In any case, Venture has moved its business model to provide entire product solutions rather than just product assembly for its customers.
  • By manufacturing location, Singapore and Malaysia represent some 60-70% of its manufacturing capacity. Singapore has a free trade agreement with the US and Venture has also completed the purchase of a freehold estate with a land area of approximately 9.64 acres and an industrial building with a builtup area of approximately 182,405 square feet in California, USA.
  • Venture also cites that its customer base is diversified. Based on our last update, the top 50 customers accounted for more than 90% of revenue. The silver lining in the current trade spat is that Venture has the capacity to take on more orders if customers choose to have them manufactured outside of China.
  • We have an ADD call and a Target Price S$30.81, based on 17.7x FY19F EPS (0.5 s.d. above its 11-year historical average of 15.5x). 
  • Venture remains on track to delivering double-digit y-o-y earnings growth in FY18F, though investors should note that 1Q is always seasonally-weaker as can be seen in its financial performance in the past five years.
  • VENTURE CORPORATION LIMITED (V03.SI)  Venture Corp Share Price  Venture Corp Target Price  Venture Corp Analyst Reports  Venture Corp Corporate Actions  Venture Corp Announcements  Venture Corp Latest News  Venture Corp Blog Articles

Memtech International (MTEC SP) – moderate risk 


Sunningdale Tech Ltd (SUNN SP) – moderate risk 


Valuetronics Holdings Ltd (VALUE SP) – moderate risk 






COMMODITIES / CHEMICALS 


Soybean crushing in China 

  • China's proposal to impose 25% import duties on US soybean is potentially negative for soybean crushers based in China, as this will increase their raw material costs (soybean). 
  • We also gathered that the list of goods that will be affected by the import duties released by China last night does not include soymeal and soy oil. This has led to concerns that China’s livestock-feed producers could start importing soymeal and soy oil instead of beans. As such, the tariff move could potentially benefit oilseeds crushers that are based outside of China at the expense of the Chinese soybean crushers.
  • However, there is a possibility that China could include the by-products of soybeans from US into the list of goods that will be impacted by the higher import duties at a later stage.
  • Two stocks under our coverage in Singapore, Wilmar and Golden AgriResources, are involved in soybean crushing activities in China. It is too early to gauge the extent of the earnings impact of this move on these companies as China has not set a date on when the import tariffs will come into effect. 

Wilmar International (WIL SP) - moderate risk 


Golden Agri-Resources (GGR SP) – low risk 



Rubber chemicals in China 

  • China's tariff list includes imported US cars, which account for only about 1% of the total automobile market (28m units in 2016) in China, by volume. China's car exports to US is an even smaller fraction as most do not meet US standards.
  • Given that the tyres that come with the new cars form just a subset of the 610m tyres sold in China with the bulk sold mainly as replacement tyres, we do not see much impact, if any, on rubber chemicals demand in China, which mainly caters to the tyre makers.

China Sunsine (CSSC SP) - low risk 

  • Main customers are international tyre makers which operate local branches catering to the domestic market in China. We have an ADD call with a Target Price of S$1.62, pegged to 9.8x FY19F P/E.


Capital Goods 


Steel impact on shipyards 

  • Singapore yards source their steel from Europe, Japan and China. Therefore, we believe sweeping tariffs for aluminium and steel may not lead to higher costs of production. Conversely, excess steel inventory in China may soften prices.
  • Prices of domestic steel coil in China have dropped 7% since US President Trump imposed tariffs on China’s steel and aluminium in early-Mar 18.

Yangzijiang Shipbuilding (YZJSGD SP) - moderate risk 

  • While lower steel prices could help to cushion shipbuilding margins in the near term for Yangzijiang, this could be negated by lower demand for iron ore and weaker global trade volumes that could precipitate in lower demand for newbuild bulk carriers and bulk carrier vessels.
  • YTD, Clarksons registered a newbuild order of 65 vessels (bulk carriers, container ships and open hatch ships), up 93% y-o-y. However, YZJ's share was only 3 vessels (less than US$100m). The Japanese market share grew 175% y-o-y to 22 vessels, other Chinese yards secured 24 vessels and the Koreans secured 14 vessels.
  • In its 4Q17 results, management guided down its order wins to US$1.8bn for 2018 vs. US$2.1bn secured in 2017, citing stiff competition. A trade war could lead to a more depressed order outlook.
  • Maintain Hold and target price of S$1.51 which is based on SOP.
  • YANGZIJIANG SHIPBLDG HLDGS LTD (BS6.SI)  Yangzijiang Share Price  Yangzijiang Target Price  Yangzijiang Analyst Reports  Yangzijiang Corporate Actions  Yangzijiang Announcements  Yangzijiang Latest News  Yangzijiang Blog Articles






LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2018-04-05
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 30.810 Same 30.810
ADD Maintain ADD 1.760 Same 1.760
ADD Maintain ADD 1.100 Same 1.100
ADD Maintain ADD 1.310 Same 1.310
ADD Maintain ADD 2.820 Same 2.820
ADD Maintain ADD 4.100 Same 4.100
HOLD Maintain HOLD 1.510 Same 1.510
REDUCE Maintain REDUCE 0.310 Same 0.310
ADD Maintain ADD 1.620 Same 1.620


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