Singapore Strategy - CGS-CIMB Research 2019-04-05: Age-defying Boost

Singapore Strategy Note - CGS-CIMB Research | YONGNAM HOLDINGS LIMITED (SGX:AXB)

Singapore Strategy - Age-defying Boost

  • The impetus for the Singapore stock market in the next few years could be the buzz created by the government’s attempt to jazz up the country. 
  • We think the construction sector will get the first boost from contract awards before multiplier effects to banks, tourism, services and the general economy. 

Everyone benefits in the longer term

  • We think the domestic economy could see some vibrancy whipping up optimism in Singapore in the next few years as a result of the upgrading of facilities in the two Integrated Resorts (IR2). This is part of the 2019 Draft Master Plan recently unveiled by the Singapore government.
  • The committed investment of S$9bn will expand and refresh the non-gaming components – hotels, theme parks and entertainment arena. This amount represents about two-thirds of the Integrated Resorts’ initial investment (c.S$15bn) in 2006.
  • When fully completed by 2025, IR2 will anchor the Marina waterfront landscape. The 5,000 jobs creation expected from the IR2 is part of continuous efforts by policy makers to create sustainable growth drivers for the economy.
  • The implications of the transformation of the area stretching from Sentosa island to the current CBD will first be felt in the construction sector before having a multiplier effect on the rest of the economy via service-producing industries (banks, tourism, hospitality, retail and professional services).
  • In the long-term, the 2019 Draft Master Plan (which includes the repositioning of the Central Business District) may defy a low-growth environment that is typical of a traditional developed economy. With this, we think there is the potential for Singapore to deliver above-trend (c.2.5%) growth expected by consensus when the master plan is fully implemented.

Construction sector gets a shot of life

The sector hardly managed a turnaround in the past five years.

  • In the aftermath of the completion of the two integrated resorts in 2010, Marina Bay Financial Centre (2012) and the dearth of residential development post cooling measures in 2013, the Singapore construction sector could hardly turn around in 2015-2017 despite public construction spending.
  • From average annual growth of c.6% p.a. in 2013-2015, the industry declined by an average of 5% from 2016 to 2017. 2018’ slight increase was from a slew of enbloc projects.

Hope arise in a new golden era.

  • With IR2 and the Draft Master Plan, we anticipate construction contracts awarded could gradually rise above the 2018 level (c.S$30.5bn) from 2020. We could also see increased jobs creation within the construction sector in the near term. The last peak of new jobs created in the sector was in 1Q18.
  • Although we may not see a similar surge as IR2 is deemed an ‘add-on’ instead of new sites, a swing from jobs loss to positive territory is welcomed.

Previous beneficiaries of the first IR developments

  • YONGNAM HOLDINGS LIMITED (SGX:AXB) (Rating: ADD; Target Price: S$0.33), which had won over S$340m worth of contracts for various elements of MBS resorts over 2007-2009.
  • TIONG SENG HOLDINGS LIMITED (SGX:BFI), in a 40-60 JV with Kajima, previously benefited from the award of Sentosa IR construction project (S$1.05bn) in Apr 2008 while Ssangyong Engineering and Construction was awarded the Marina Bay Sands (MBS) development (c.S$1.03bn) in Sep 2007. 
  • Some construction firms that had gained from involvement in subcontractor works in the IR developments include:
  • We think some of these construction-related firms could potentially stand to gain from new construction contracts to be awarded from the expansion of the IRs as these firms have already established a track record in IR development during 2007-2010. Figure 12 in attached PDF report shows the earnings trend for some of the supply chain of construction and infrastructure companies spanning across multiple disciplines such as engineering, raw material suppliers, steel stockists and building contractors (interior and exterior specialists).

Potential loan growth from general economic optimism

  • We think lending could respond to the surge in mega-construction projects as well as the potential for above-trend GDP growth in Singapore.
  • In the previous cycle of the Integrated Resort 1 S$15bn build-up, system loan growth raced from +6.5% y-o-y in 2006 to +28.8% in 2007, but was cut short in 2008 and 2009 by the Global Financial Crisis (GFC).
  • Domestic (DBU) lending to the building and construction industry (14% of system loans) expanded by 29-36% y-o-y in 2007-2008 on the back of the 2006 investment. DBU grew by 12.7% in 2018, mainly in 1H18, which thrived on numerous en-bloc transactions before the property cooling measures in July 18 which stymied both developers’ and buyers’ appetites.
  • We believe progressive drawdowns of the IR2 S$9bn investment could begin in 2020 as the details are ironed out. Assuming a linear drawdown over 5 years, DBU could only inch by c.1.5% pt p.a. as the investment rolls out. However, we are more hopeful of loan growth from the ripple effects of IR2, including rail and road networks, new business opportunities and employment coming through. This should sustain overall banking system growth of c.5% p.a. Upside could come from positive spillover of stronger-than-expected GDP growth.

Other multiplier beneficiaries

Tourist arrivals and spending.

  • The full impact of this latest upgrades of IR2 will only be felt four to five years down the road. Tourist arrivals grew by c.6% p.a. from 9.75m p.a. in 2006 to 18.51m in 2018 and we think the momentum is likely to continue. More importantly, we believe the tourist average length of stay (ALS) could recover from the current low of 3.33 in 2018 with more incentives to stay, and per capita spending could step up.
  • Note that ALS spiked from 3.4 days in 2006 to c.4 days post completion of IR1, while average per capita spending was up by 48% to S$1,280 in 2010.

Implication for stocks.

Valuations and recommendation

  • Our current end-2019 index target remains at 3,110, based on 12x CY20F P/E, or -0.5 s.d of mean.
  • Potential earnings upgrades across the domestic sector could lead to a re-rating of index to historical mean of c.13.6x forward (P/E), or c.3,500 assuming no major shocks to the global economy outlook.

Highlighted Companies


  • Rating: ADD, Target Price: S$0.33.
  • Yongnam had previously won contracts worth over S$340m for various elements of the Marina Bay Sands resort and is potentially poised to win further structural steelworks from IR expansion.
  • Maintain ADD and Target Price of S$0.33, based on 0.7x FY19 P/BV (20% discount to its long-term average of 0.9x).

LIM Siew Khee CGS-CIMB Research | 2019-04-05
SGX Stock Analyst Report ADD MAINTAIN ADD 0.330 SAME 0.330