Singapore Monthly (June 2019) - DBS Research 2019-06-04: Trade War Part 2

SINGTEL (SGX:Z74) NETLINK NBN TRUST (SGX:CJLU) SATS LTD. (SGX:S58) SINGAPORE TECH ENGINEERING LTD (SGX:S63) THAI BEVERAGE PUBLIC CO LTD (SGX:Y92)

Singapore Monthly (June 2019) - Trade War Part 2

Mid-month FOMC meeting – hints of a rate cut could trigger rebound in an oversold market.
STI should hold up at 3000 unless an all-out trade war becomes a reality; short-term resistance is at 3190.
Defensive names in favour - SATS, ST Engineering, Thai Beverage, Sheng Siong, SingTel, NetLink Trust.
REITs should continue to garner interest – we favour Mapletree Logistics Trust, Frasers Commercial Trust and Keppel-KBS US REIT.

STI tumbled 8.3% last month as fears of a US-China all-out prolonged trade war made a sudden unexpected return.
Cyclical sectors suffered the most, pulled down by banks, oil and gas, and property stocks.
Telecom (SingTel, NetLink Trust) and SREIT sectors outperformed as investors sought traditional safe havens and yield.
(see Performance of The Straits Times Index STI and Constituents in May 2019)

FOMC meeting
- FED funds futures currently anticipate a rate cut as early as September this year.
- Keep watch on clues for possible rate cut later this year as this meeting is associated with a summary of economic projections.
Trump-Xi sideline talks at G20
- Trump’s ‘John Wayne’ style of flashing tariffs at Mexico has investors worried that US-China trade impasse is likely to be prolonged.
- There is growing belief that the current friction will go beyond issue of trade deficit.
- For one, the US is determined to stop China’s emergence as a technology super power.

May sell-down signalled the continuation of the US-China trade war that is now threatening to be prolonged.
Recall ‘Part 1’ ended at end-Oct last year at STI 2966 with US imposing 25% tariffs on USD50bn of Chinese imports and 10% on an additional USD200bn.
‘Part 2’ started in early May with an increase in tariffs from 10% to 25% on USD200bn and Trump threatening to impose 25% tariffs on another USD300bn imports, i.e. an all-out war.
All-out trade war could see Singapore’s 2019F GDP growth dip to the lower end of MTI’s forecast at 1.5%.
Two positive differences
- FED is much more dovish compared to last year.
- Chinese government is supportive of growth compared to last year.
DBS Economics Research’s views on the implications of an all-out trade war - see PDF report here.

Selling of index heavyweight banking stocks resulted in STI’s rapid decline last month.
Failure of key 3190 support level points to 3120 (that’s gone too), 3068 and 3000 in the short-term.
At 3068, STI trades at above 11.7x (-1.25SD) 12-mth fwd PE.
If 3000 is tested, STI would be at 11.41x (-1.5SD) 12-mth fwd PE.
Valuation appears ‘cheap’ because forecasts have not factored the worsening trade war that is currently unfolding.
We see the 3000-level holding up unless an all-out trade war becomes a reality.
Oversold technical bounces for cyclical stocks will occur but timing is the million-dollar question.
Event to watch before G20 is FED meeting on June 18-19 and hints of any rate cut.

Cyclical stocks are crumbling under the weight of the rapidly worsening US-China trade relations over the past one month. The odds of a US-China all-out trade war appear higher and closer now when just two months back, it looked more like an unlikely nightmare. With no clarity in sight, we believe that investors will continue to hide in defensive names whose underlying business is resilient against worsening trade tensions. Our picks are SATS LTD. (SGX:S58), ST ENGINEERING (SGX:S63), THAI BEVERAGE (SGX:Y92) and SHENG SIONG GROUP (SGX:OV8).
The telecom sector traditionally outperforms in the current uncertain macro backdrop that disfavours cyclicals. We see no exception this time round, with the FTSE ST Telecom Index the best performing index in May. Our picks are SINGTEL (SGX:Z74) and NETLINK NBN TRUST (SGX:CJLU). SingTel is likely to see earnings recovery going forward. Final dividend payout of S$0.107 (ex-date 26 July) should also help underpin the stock over the next 1-2 months. Meanwhile, NetLink Trust offers a yield of 6%.

Company	Closing Price 30 May 2019	12-mth Target	Target Price Return	Mkt Cap (S$m)	Rcmd	Div Yield 19 (%)	Net Debt / Equity 19	P/BV 18 (x)
SINGTEL (SGX:Z74)	3.20	3.55	11%	52,251	BUY	5.5	0.4	1.8
ST ENGINEERING (SGX:S63)	3.91	4.50	15%	12,204	BUY	4.1	0.4	5.4
SATS LTD. (SGX:S58)	5.03	5.44	8%	5,605	BUY	4.0	cash	3.4
NETLINK NBN TRUST (SGX:CJLU)	0.83	0.90	8%	3,234	BUY	6.0	0.2	1.1
SHENG SIONG GROUP (SGX:OV8)	1.090	1.25	14%	1,639	BUY	3.3	cash	5.6
THAI BEVERAGE (SGX:Y92)	0.81	0.91	13%	20,342	BUY	2.7	1.3	3.9

REITs is another sector that outperformed last month. With the negative macro developments still unfolding and expectation for the FED to cut rates later this year an increasing possibility, REITs should continue to garner interest.
Our picks are MAPLETREE LOGISTICS TRUST (SGX:M44U), FRASERS COMMERCIAL TRUST (SGX:ND8U) and KEPPEL-KBS US REIT (SGX:CMOU). Meanwhile, retail REITs such as CAPITALAND MALL TRUST (SGX:C38U) and MAPLETREE COMMERCIAL TRUST (SGX:N2IU) have defensive attributes if the US-China trade war worsens.

Company	Closing Price 30 May 2019	12-mth Target	Target Price Return	Rcmd	Div Yield 19 (%)	Net Debt / Equity 19
MAPLETREE LOGISTICS TRUST (SGX:M44U)	1.47	1.60	9%	5.5	0.4	1.2
FRASERS COMMERCIAL TRUST (SGX:ND8U)	1.52	1.70	12%	6.3	0.4	0.9
KEPPEL-KBS US REIT (SGX:CMOU)	0.735	0.80	9%	11.2	0.6	0.7

Kee Yan YEO CMT DBS Group Research | Janice CHUA DBS Research | https://www.dbsvickers.com/ 2019-06-04

SGX Stock Analyst Report BUY MAINTAIN BUY 3.550 SAME 3.550

BUY MAINTAIN BUY 0.900 SAME 0.900

BUY MAINTAIN BUY 5.440 SAME 5.440

BUY MAINTAIN BUY 4.500 SAME 4.500

BUY MAINTAIN BUY 0.910 SAME 0.910