Singapore Market Focus - DBS Research 2020-02-10: When China Catches A Cold, Asia Turns Pale

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NETLINK NBN TRUST (SGX:CJLU) SINGTEL (SGX:Z74) KEPPEL DC REIT (SGX:AJBU) MAPLETREE INDUSTRIAL TRUST (SGX:ME8U) MAPLETREE LOGISTICS TRUST (SGX:M44U)

Singapore Market Focus - When China Catches A Cold, Asia Turns Pale

• Spotlight on Singapore Budget – Anticipate overall deficit of about S$7.9bn.
• Still too early to tell if 2019-nCoV infection rate in China has peaked, history shows viral outbreaks tend to weaken from summer months.
• 2020 GDP lowered to +0.9%y-o-y, expect STI to hold up at 3085- 3110, unless the current situation worsens into a pandemic.
• Barbell strategy – Defensive/yield (NetLink NBN Trust , SingTel, Ascendas REIT, Mapletree Industrial Trust, Mapletree Logistics Trust, Keppel DC REIT); undervalued stocks with good post-contagion recovery potential (ComfortDelGro, Yangzijiang Shipbuilding, Genting Singapore and Singapore Airlines).

All eyes on Singapore Budget.

• Our economist expects a strong budget to
  1. help companies (e.g. transport, aviation, tourism) and Singaporeans cope with the impact of the 2019-nCOV and rising costs,
  2. tackle PMET retrenchments,
  3. enhance capabilities and skills upgrading, and
  4. set aside funds for an impending GST offset package estimated at S$5.6bn.
• An overall deficit of about S$7.9bn (1.6% of nominal GDP) is anticipated.

Monitoring China’s containment efforts.

• China’s unprecedented measures appear to show some effectiveness as the number of daily new infections has dipped from 3,918 to 3,171. However, the figure could rise again with the latest opening of a new Wuhan testing facility (10,000 samples/day) and Chinese workers returning to work from 9 February. The current mortality rate is 2% but substantially lower at 0.8% ex-China.
• On a positive note, we observe that past epidemics/pandemics show a tendency to weaken and be controlled as temperature and sunlight exposure increases with the approach of summer months.

Singapore’s GDP impact of 2019-nCoV

• 2020F GDP cut to +0.9% (previously +1.4%) y-o-y, assuming a sharp 1Q decline followed by recovery in 2Q.
• Impact could be worse than SARS as Singapore economy now much more integrated to China
  • Expect a decline of about 1mil tourists or about S$1bil of lost tourism receipts for every three months of travel ban
  • Supply chain disruptions will have significant impact on Singapore’s manufacturing sector given China’s 17.3% share of NODX.
  • Labour shortages with mandatory 14 days leave of absence for workers returning from China.

STI resilient in past pandemics/epidemics

• In previous pandemics/epidemics, the STI was either unaffected, or experienced either a short-lived negative reaction followed by a recovery.
• Historically, markets recover once the outbreak shows sign of containment and investors focus on the positive government stimulus and economic recovery.

Straits Times Index rebounds off technical support

• STI suffered a correction depth of -0.5SD from 12.59x (- 0.5SD) to below 12x (-1SD) 12-month forward PE.
• Current rebound off 3112 coincides with STI technical support levels at 3110 and 3085.
• 3085 coincides with 11.7x (-1.25SD) 12-month forward PE.
• Unless the current situation worsens into a pandemic, we expect STI to hold at 3085-3110.

Barbell Strategy

• We advocate a balance of
  1. defensive/yield amid the pullback in 10-year yield, and
  2. undervalued stocks trading near historical extreme that helps to cushion against steep downside should the spread of 2019-nCoV worsen but yet have the potential to recover swiftly once the contagion is under control.
• The 2019-nCOV situation is still evolving. China’s unprecedented lockdown measures of entire cities could show its effectiveness as early as this month given the lockdown of Wuhan, Huangang, Ezhou and Chiba from 23 January, and virus incubation period of up to 10-14 days. Government stimulus and support to help companies cope with the impact of the outbreak should also lend support to the stock market.
• Alternatively, headline data on the number of daily new infections out of China may worsen as more testing facilities come on stream and as the Chinese return to work from 9 February after the prolonged Lunar New Year break. The coronavirus spread outside of China may also pick up although with 99% of infection cases in China, investors’ focus will be on how China is able to contain the outbreak.

Defensive & Yield

• Our picks are NetLink NBN Trust , SingTel, UOB and industrial REITs Ascendas REIT, Mapletree Industrial Trust, Mapletree Logistics Trust, and Keppel DC REIT.
• Telecom stocks SingTel (SGX:Z74) and NetLink NBN Trust (SGX:CJLU) are defensive names that tend to outperform during uncertain times, especially during this period when online, audio and video conferencing is the preferred communication mode. While UOB (SGX:U11) is more a cyclical than a defensive name, it has the least exposure to China and the attractive dividend yield of 4.8% could lend support to the stock with the upcoming FY dividend announcement.
• Industrial REITs offers a mix of resilience in this environment due to their longer WALE. Industrial rental rates are showing signs of bottoming out, especially those with heavy exposure within the data centres (Mapletree Industrial Trust (SGX:ME8U), Keppel DC REIT (SGX:AJBU)), business parks (Ascendas REIT (SGX:A17U)) and logistics space (Mapletree Logistics Trust (SGX:M44U)).

Bombed out valuations/strong recovery potential once outbreak is controlled

• Our picks are ComfortDelGro, Yangzijiang Shipbuilding, Genting Singapore and Singapore Airlines.
• Yangzijiang Shipbuilding (SGX:BS6) fell below net cash/share of $1 last week. ComfortDelGro (SGX:C52) trades at 15.8x/ 1.7x that is -1SD of its 5- year historical PE and P/BV band. Genting Singapore (SGX:G13) trades at 5.9x EV- to-EBITDA, at around -1.5SD and against a historical low of 5.8x. Singapore Airlines (SGX:C6L) currently trades at less than 0.8x P/BV that is nearly at -2SD.
• Genting Singapore and Singapore Airlines will feel the impact of travel restrictions in the short term. While the number of new infection cases out of China has eased a little in the past two days, the figure will likely turn higher again for two reasons:
  • Opening of new testing facility in Wuhan with a capacity of 10,000/day, and
  • Chinese workers returning to work from 9 February.
• There is also the possibility of worsening community spread in Singapore.
• The short-term sentiment for travel-related stocks remains weak. However, looking beyond the short term, both stocks should have strong recovery potential once the contagion is controlled. Observations of past epidemics/pandemics show that viral outbreaks tend to weaken and be controlled as temperature and sunlight exposure increases with the approach of summer. Anticipated government support for the aviation and tourism sectors should also lend support to these stocks.

Kee Yan YEO CMT DBS Group Research | Janice CHUA DBS Research | https://www.dbsvickers.com/ 2020-02-10

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