Singapore Market Strategy - CGS-CIMB Research 2020-01-22: Market May Catch A Flu If China Sneezes

Singapore Market Strategy - CGS-CIMB Research | SGinvestors.io RIVERSTONE HOLDINGS LIMITED (SGX:AP4) DAIRY FARM INT'L HOLDINGS LTD (SGX:D01) RAFFLES MEDICAL GROUP LTD (SGX:BSL) SINGAPORE AIRLINES LTD (SGX:C6L)

Singapore Market Strategy - Market May Catch A Flu If China Sneezes




What happened last time?


SARS – 11 Feb 2003

  • The SARS outbreak hit Singapore in Feb 2003 and claimed 33 lives. There was a knee-jerk sell-off across regional markets in the first week. However, one month after the SARS outbreak, most markets recovered, with the exception of Singapore and HK as the two countries took a while longer to recover due to high incidence of SARS cases.
  • During the period of 18 Nov 2002 to 11 Mar 2003, MSCI Singapore dropped by 14%. From 10 Feb 2002, when media started to report death count, to the bottom of the market on 11 Mar 2003, Singapore market dropped by 6%. It fell by another 6% in the month from 25 Mar 2003 when Singapore reported its first SARS death case. As such, we estimate 6-12% downside risk for the index from the current levels.
  • The biggest losers during the period from Nov 02 to Mar-03 were economic proxies such as developers (c.-19%) and banks (c.-22% y-o-y). SIA (SGX:C6L)’s share price fell 11% as the impact on its earnings was significant. Passenger traffic fell 35% y-o-y in 2QCY03 at the peak of the SARS crisis. Revenue fell 35% y-o-y to S$1.6bn, while it reported a net loss of S$312m (2QCY02: net profit of S$478m). However, by 2QCY04, SIA’s revenue rebounded by 65% (lower than passenger traffic growth of 97% y-o-y due to fare discounts and promotions), while it recovered into the black to report a net profit of S$255m (albeit lower than 2QCY02’s net profit). Overall tourist arrivals in Singapore declined 19% y-o-y with RevPAR down 17% y-o-y on the back of lower occupancy (-7.2% pts y-o-y) and average daily rate (-8.3% y-o-y). 2003 GDP growth came down to only 1.1% in 2003.
  • We would like to highlight that the market has become increasingly immune to event-driven shocks since 2003 as global governments are more prepared for public-health emergencies We would bargain hunt if the market weakens in the near term.

Avian Influenza 10 Jan 2006 and 1 April 2013

  • No cases were detected in Singapore, either in humans or poultry, but authorities remained vigilant on cases in Malaysia. Hospitals prepared H7N9 detection kits for potential cases. MSCI Singapore fell 14% from market peak to trough (3 May-14 June 2006) and was down 12% from 20 May - 24 June 2013 with no specific proxy sectors affected by the virus. We believe this was more due to the general weak sentiment in May.


Steps likely to be taken by the government for the current outbreak

  • In 2003, the Singapore government rolled out a S$230m SARS relief package to help industries that had been more severely impacted, particularly the tourism and transport-related industries. Some measures included additional 30% rebates on airport landing fees, property tax relief for commercial properties such as hotels, shops and restaurants, as well as lower levy paid by employers on foreign workers they hired.
  • Some of the efforts that are likely in the case of a prolonged outbreak are as follows:-
    • Stepping up health screening efforts at all international entry points
    • Imposing travel restrictions or advisories to and from countries that have influenza outbreaks
    • Issuing public advisory calling for targeted groups of people to get flu vaccinations
    • Increasing resources such as isolation facilities in hospitals and stockpiling medicine. Front-line healthcare workers in hospital and polyclinic settings will be given anti-viral prophylaxis for the duration of the pandemic.


Sectors/ stocks that are defensive/ beneficiaries/ vulnerable


Defensive = less bad


Potential beneficiaries

  • The continued negative newsflow from the pandemic through Chinese New Year could be a catalyst for glove manufacturers such as Riverstone (SGX:AP4). Glove makers could see a rise in demand if the outbreak is prolonged and turns into a global pandemic. We witnessed this during the SARS outbreak in 2003 and avian flu in 2009. We estimate that global glove demand rose 10-13% in 2003 and 2009 (vs. 8% p.a. in 2000-18). Riverstone derives c.70% of its revenue from healthcare gloves. Currently, our base case assumptions factor in mid-teen volume growth for its healthcare gloves in FY20F, driven by enhanced awareness about hygiene and healthcare standards without any major virus outbreak.
  • Healthcare providers and producers of medical gloves could be potential beneficiaries depending on the extent and length of the outbreak. During SARS, there was a positive share price reaction for Raffles Medical Group (SGX:BSL), as it was appointed by the immigration and checkpoint authorities (Civil Aviation Authority of Singapore, Immigration and Checkpoints Authority, and Maritime and Port Authority of Singapore) to conduct screening for fever and other symptoms at the air, land and sea border checkpoints. We also note that the official opening of Raffles Hospital in March 2002 could have been another share price driver. If the novel coronavirus continues to escalate and proves to be as severe as SARS, we think this could also benefit Raffles Medical Group in terms of redirection of patient footfall (from public hospitals), at both its Singapore and China hospitals.

Most vulnerable

  • The most vulnerable sectors are aviation, gaming, hospitality and consumer discretionary and ones with China exposure. For SIA (SGX:C6L), we expect a SARS-like impact on its passenger traffic and financial performance if the epidemic sweeps across Asia. SIA would not only see passenger load factors decline considerably, it would also have to slash airfares in order to incentivise passengers to fly again, while much of its operating costs are fixed in the short term. SIA can take mitigating actions like cancelling selected flight frequencies, and implementing a no-pay leave policy for staff or cutting staff allowances. In addition, SIA may be able to claim some assistance from the Singapore government and/or some incentives from airports, although these would only partially offset the negative impact on its bottomline, in our view. Unlike in 2003, when the SIA Group operated with only two brands – the flagship SIA full service carrier and its regional subsidiary SilkAir – the group now has a well-established low-cost brand named Scoot. As a result, we expect the SIA Group to be able to cope better with any epidemic-like contagion, as it can use low-cost carrier Scoot to drive traffic via fare discounts.
  • SATS (SGX:S58)’s inflight catering dropped 14% y-o-y and ground handling -10% y-o-y during the SARS outbreak on the back of cancellation and suspension of many flights during the first quarter after the outbreak.
  • Hospitality names such as Far East Hospitality Trust (SGX:Q5T) could see the largest impact given its 41% of variable income exposure to Singapore. This is followed by CDL Hospitality Trusts (SGX:J85) which has 32% variable income exposure in Singapore. The impact on Ascott Residence Trust (SGX:HMN) should be less severe as 27% of its revenue is generated from China, Hong Kong and Southeast Asia. Based on our sensitivity analysis, a 1% pt decline in tourist arrivals in Singapore will reduce our industry RevPAR assumption by 1% pt, and a decline of 1% pt in RevPAR/RevPAU will reduce our Far East Hospitality Trust and CDL Hospitality Trusts’s FY20 DPU forecasts by 1% and 0.3% respectively. Consumer discretionary proxies such as city shopping malls and outlet malls are also at risk, including Starhill Global REIT (SGX:P40U) and SPH REIT (SGX:SK6U).
  • Companies with significant China exposure may be impacted, including Dairy Farm International (SGX:D01). In 2003, Hong Kong’s retail sales value decline 2.3% y-o-y and tourist arrivals declined 6.2% y-o-y. Dairy Farm International also specifically mentioned that SARS had reduced sales at its Maxim's (restaurant associate earnings fell -30% y-o-y) and 7-11 stores. Given the heightened risks of further declines in retail sales and tourist arrivals amidst protests, Dairy Farm International's North Asia revenues and EBIT (65% of 1H19 revenue/~90% of 1H19 EBIT) as well as restaurant earnings (~20% of 1H19 net profit) could suffer a double whammy effect.
  • CapitaLand (SGX:C31) had 41% of its 3Q19 operating EBIT from China. CapitaLand Retail China Trust (SGX:AU8U) has 100% of portfolio based in China with one mall in Wuhan. Sasseur REIT (SGX:CRPU) also has 100% of its portfolio in China but no outlet in Wuhan. Mapletree Logistics Trust (SGX:M44U) has 24 properties in China out of its 144 total, making up 9% of AUM and 11% of 1HFY3/20 gross revenue. In terms of Wuhan exposure, it has a 50% stake in the Mapletree Wuhan Yangluo Logistics Park which forms c.0.4% of the total group gross revenue in 1HFY3/20F. There is no historical share price impact evidence during 2003 SARS/2005-2006 Avian flu as Mapletree Logistics Trust was listed in 2007. Keppel Land derived c. 66% of its home sales from China as of 9M19.
  • See attached PDF report for complete analysis.





LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-01-22
SGX Stock Analyst Report ADD MAINTAIN ADD 1.250 SAME 1.250
REDUCE MAINTAIN REDUCE 5.400 SAME 5.400
ADD MAINTAIN ADD 1.160 SAME 1.160
HOLD MAINTAIN HOLD 10.000 SAME 10.000



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