Singapore Strategy - UOB Kay Hian 2020-03-16: COVID-19 Impact


Singapore Strategy - COVID-19 Impact

  • The duration of the COVID-19 outbreak is a key unknown factor affecting markets and the economy. Policy measures have been implemented and it appears that further aid will be forthcoming from the government.
  • Our sensitivity analysis indicates that in a worst-case scenario, almost all sectors would see double-digit earnings decline with telcos showing the most earnings resilience.
  • We continue to advocate selective buying of blue-chip stocks given the STI’s near-trough P/B level of 0.9x for 2020F.


The key unknown is how long the COVID-19 outbreak will last.

  • In our view, the key variable for an assessment of the economic and financial damage from the COVID-19 outbreak, and thus its impact on the companies under our coverage is: How long will it last?
  • Our prior base-case scenario assumed that the coronavirus would peter out by mid-year; however, the Singapore government as well as the World Health Organisation have stated that COVID-19 may well last until the year end.

Singapore government’s initial policy response was timely

  • Singapore government’s initial policy response was timely, albeit slightly underwhelming with the benefit of hindsight.
  • On 18 Feb 20, the Singapore Budget 2020 announced S$5.6b in measures to assist companies as well as individuals, and following on from that, in an address to the nation on 12 Mar 20, the Prime Minister indicated that the government is looking to provide a second round of aid to the economy. Even accounting for policy responses from global central banks and governments, as the outlook for the virus and economy deteriorates as expected, global growth in 2Q and 3Q20 will be negatively impacted in our view.

Sensitivity analysis shows material double-digit earnings declines for almost all sectors in 2020.

  • Our earnings-sensitivity analysis compares our current earnings estimates against three negative-impact scenarios:
    1. 2Q disruption,
    2. 2Q and 3Q disruptions; and
    3. 2Q to 4Q disruptions.
  • Our analysis indicates that in a worst-case scenario, almost all sectors would see double-digit earnings declines with telcos showing the most earnings resilience. Note that given the significance of the banks, REITs and aviation sectors, these will be covered in a separate report. See attached PDF report for further details.


Electronic manufacturing sector (EMS).

  • SGX-listed EMS players with exposure to China would see an adverse impact from the near-term drop in production capacity, supply chain disruptions, delay in shipments and potentially weaker demand as the outbreak escalates in other countries.
  • For the EMS players under our coverage, we believe companies such as Sunningdale Tech (SGX:BHQ) and Valuetronics (SGX:BN2) would be more heavily impacted as its factories are mainly located in China with the former potentially seeing a more significant impact given its higher exposure to the automobile and consumer segments.
  • National Bureau of Statistics (NBS) on 29 February reported that China’s manufacturing sector PMI stood at 53.7 in Feb 20, a decline from 50 in Jan 20. That said, it appears that production activities are recovering, given that 78.9% of the enterprises surveyed by purchasing managers in China had returned to work as of 25 Feb 20, of which 85.6% were large and medium-sized manufacturing enterprises.

Food & beverage sector.

  • Singapore has recently put in place additional travel restrictions aimed at limiting the spread of COVID-19. In addition to the earlier ban on tourists from Mainland China, all new visitors with recent travel history to Iran, northern Italy and South Korea will not be allowed entry into or transit through Singapore. Needless to say, tourism-related sectors such as the F&B are negatively impacted and are likely to take a significant hit in 2020.
  • Tourism receipts for food & beverage reached S$1.8b for 9M19 of which China and South Korea contributed to approximately 12.2% and 3.6% respectively. Full-service restaurants located in malls that are more dependent on tourists will be harder hit. Apart from a drop in sales, fixed overheads will further impact earnings of F&B services companies. The impact could however be partially absorbed by rental subsidies from landlords and budget relief measures.


  • Our assessment assumes various periods of duration with constant assumptions:
    1. 50/50 split in VIP/mass market GGR for 1H/2H20 (1H18: 40:60),
    2. GGR declines 30% y-o-y in the infected quarters, with GGR declining 15% y-o-y in the subsequent one quarter, and
    3. non-gaming revenue falling at a similar percentage to the fall in visitorship. This GGR decline assumption factors in Singapore’s Greater China (China, Macau, Hong Kong, Taiwan) tourist arrivals that accounted for about 24.3% of 2019’s total tourist arrivals.
  • Our sensitivity analysis suggests that Genting Singapore (SGX:G13)’s EBITDA may decline between -20% and -44% for 2020.
  • Recall that in 2003, SARS’ infection period on the gaming industry in Macau and Malaysia lasted for only four months. In the worst-case scenario, our assessed trough value on Genting Singapore is around S$0.80 based on 4.6x 2021F EV/EBITDA (-2SD below mean). Our trough valuation is supported by a dividend yield of 4.4% and net cash backing of S$0.34/share.


  • We think Raffles Medical (SGX:BSL) would likely be more affected by an extended COVID-19 outbreak. This is due to its overseas patient load, which may defer non-essential medical services, and a drop in patient load from general hospital admissions.

Land transport.

  • ComfortDelGro (SGX:C52) would mainly feel the effects from its taxi business as well as some effects from lower ridership in rail transport. For the local taxi business, thus far, we have seen taxi rebates on the local front amounting to approximately S$18m-20m for ComfortDelGro up to the end of May 20.
  • Including the government package announced, this works out to a daily rental reduction of $36.50 till the end of March, $30 till the end of April and $20 till the end of May for taxi drivers. Our sensitivity of earnings decline assumes that the rebates extend at a reduced rate of S$10 per day if subsequent quarters are affected. We also account for lower rail transport ridership for the Downtown Line in our sensitivity analysis

Plantation sector.

  • CPO prices may trade lower in the near term after the sharp decline in crude oil prices and amid rising concerns on global economic growth amid the COVID-19 outbreak. The recent selling pressure on palm oil was also partly driven by negative market sentiment. Although a gradual recovery is expected towards late-2Q20 as supplies are expected to be tighter due to the dry weather in 2019, we are unlikely to see CPO price return to its recent high of above RM2,900/tonne.
  • On 13 Mar 20, we adjusted our demand growth projection to +0.5% y-o-y from +2% y-o-y earlier to factor in the potential demand reduction from the COVID-19 outbreak and lower biodiesel demand with crude oil prices down 49% ytd. The adjustment to our stock-to-usage ratio (SUR) projection post the downward revision to our demand growth assumption would have a minimal impact to our price assumption of RM2,400/tonne for 2020 as we had been conservative with our assumption earlier. The adjusted SUR of 14.8 is still below the SUR of 16.9-20.3 recorded in 2017-19. This is supportive of a higher ASP estimate for 2020 vs 2019’s ASP of RM2,074/tonne.

Property developers and agencies.

  • For property agencies, we believe there will be a negligible impact as this will likely be more than offset by COVID-19 stimulus (ie lower mortgage rates) which is supportive of home buying.
  • For Singapore property developers, new project sales may slow down; however, we believe that the earnings impact will only likely be felt 2-3 years later when actual construction takes place. In any case, if we were to look at the example of Wing Tai (SGX:W05)’s recent launch of its residential development at Bugis called “The M”, the company experienced an excellent sales performance with 70% of the units sold on the launch weekend over 22-23 Feb 20 despite Singapore being in the middle of the COVID-19 outbreak.


  • The key issue for Singapore-based shipyards, unlike those in China, is whether they will continue to receive new orders rather than suffer from a lack of workers. At the moment, this is the key hurdle faced by Yangzijiang Shipbuilding (SGX:BS6) as its shipyards have only seen c.30% of its workers return to work. During its 2019 results briefing, the company was hopeful that 80% of its workers would be back at work by end-March for it to be able to hit its production and profit targets for 2020.
  • For the Singapore shipyards, new order flow for exploration assets (rather than production assets) may face near term headwinds as the Russia-OPEC price war has put extra downward pressure on an oil price that had already seen COVID-19 related weakness. Looking at Keppel Corp (SGX:BN4) and Sembcorp Marine (SGX:S51)’s orderbooks, it is apparent that only 10-15% of both companies’ orders are exploration assets while the rest are either production assets or renewables and thus not affected by oil companies cutting exploration capex plans.
  • For all the shipyards, degradation in gross-profit margins may occur due to delays in regional and global supply chains and inefficient production due to lack of optimal levels of manpower.


The downdraft in the STI over the past two weeks has resulted in the index trading near historically low valuations.

  • The STI’s 2020F P/B of 0.9x is at a significant 41% discount to its 10-year mean of 1.53x while on a PE basis, its 2020E PE of 11.1x is 25% below the 10-year mean of 14.8x (excluding the 1999 peak). During intra-day trading on 13 Mar 20, the STI’s 2020F P/B fell to 0.87x which was the same level as that seen during the 2008 Global Financial Crisis, but still above the 0.7x that was seen during the Asian Financial Crisis.

Negative earnings revision momentum for consensus and UOBKH.

  • We highlight that Bloomberg FY20 consensus EPS forecast has dropped by 4.1% since the beginning of 2020. After the 2019 results, we note that UOB Kay Hian’s core EPS has been downgraded by 2.3% in aggregate across all sectors for 2020 while 2021 has seen a downgrade of 1.1%.
  • In our view, should the COVD-19 outbreak prolong into 4Q20, there is further downside risk to our earnings estimates.

Adrian LOH UOB Kay Hian Research | Singapore Research Team UOB Kay Hian | https://research.uobkayhian.com/ 2020-03-16
SGX Stock Analyst Report BUY MAINTAIN BUY 1.050 SAME 1.050