Singapore Stock Alpha Picks (May 2021) - UOB Kay Hian 2021-05-05: Add SGX & Hong Leong Asia; Remove China Sunsine & Thai Beverage


Singapore Stock Alpha Picks (May 2021) - Add SGX & Hong Leong Asia; Remove China Sunsine & Thai Beverage


Singapore Stock Alpha Picks (Apr 2021) portfolio outperformed in Apr 21.

  • For Apr 21, our Singapore Stock Alpha Picks portfolio outperformed the STI by 4.3ppt, gaining 6.0% m-o-m vs the STI which rose 1.7%.
  • Strength in Singapore’s recent data, such as the Apr 21 manufacturing Purchasing Managers’ Index (PMI) and March industrial production which rose 7.6% y-o-y, belies nearer term risks such as the country’s and the region’s increased COVID-19 infection rate which may put a pause on recovery hopes.
  • Nevertheless, we believe that our portfolio adequately hedges against such risks given our short call on SIA and our long call on Yangzijiang Shipbuilding which generates all of its revenue in China.

Adding SGX and Hong Leong Asia.

  • We add Singapore Exchange (SGX:S68) as we expect elevated cash equities trading volumes and higher fee per contract for equity derivatives in 2HFY21 while its valuation metrics are below that of its global peers.
  • We also add Hong Leong Asia (SGX:H22) as we like its established track report and an expected strong recovery in the building materials sector. Besides, its diesel-engine segment should benefit from accelerating demand due to a new product version, while its new energy solutions segment could drive long-term growth

Removing Thai Beverage and China Sunsine.

  • We remove Thai Beverage (SGX:Y92) due to the lack of near-term catalysts in our view, especially given the company’s deferral of its proposed beer segment IPO.
  • After a 14.1% return since its inception, we have elected to take profit on China Sunsine (SGX:QES).

Singapore Stock Alpha Picks For May 2021

Singapore Exchange (SGX:S68) – BUY (Lucas Teng)

  • Volatility and hedging needs remain. Trading volume for SGX (SGX:S68) remains elevated with 3QFY21 cash equities’ daily average value (DAV) traded of S$1.52b almost 50% higher compared with FY19 levels. The resurgence of COVID-19 cases and the downside risk it entails could also continue to spur hedging needs in derivatives trading.
  • Multi-asset exchange supports resilient revenue stream. SGX has a wide range of liquid derivative products in key asset classes such as equities, currencies and commodities, which assure customer stickiness. Derivatives trading currently forms a larger portion of revenue contribution (49% in FY20 vs 30% in FY14)
  • MSCI changes to boost derivatives volume; higher average fee per contract. The coming changes for the MSCI Singapore Index could see higher volumes with the addition of foreign listed entities. In addition, introductory fees for the FTSE Taiwan Index will also be reduced from 3QFY21, raising average fee per contract.
  • Below peers’ valuation. SGX currently trades at 23.7x FY22F P/E, below peers’ average multiple of 28.0x. New initiatives (eg SPACs, secondary listings) could potentially re-rate SGX to trade closer to its developed markets counterparts of similar size, such as the ASX or Japan Exchange Group.
  • See SGX Share Price; SGX Target Price; SGX Analyst Reports; SGX Dividend History; SGX Announcements; SGX Latest News.

Share Price Catalysts

Hong Leong Asia (SGX:H22) – BUY (John Cheong)

  • Established track record and strong recovery for building materials segment. Hong Leong Asia (HLA) has been listed in the SGX since 1998 and is part of the Hong Leong Group conglomerate, one of the largest globalised corporations in Asia. Hong Leong Asia started as a building materials supplier before venturing into the diesel engine segment. Hong Leong Asia’s building materials unit is one of the largest integrated players in Singapore, providing ready-mix concrete and precast concrete elements for public housing construction. Its subsidiary, Tasek, is the fourth-largest cement producer in Malaysia. We expect the earnings of the building materials segment to grow by 55% y-o-y for 2021, driven by better sales volume as well as better ASPs for precast and ready-mix concrete as construction activity resumes.
  • Diesel engine segment to benefit from accelerating demand due to a new product version, while new energy solutions could drive long-term growth. Hong Leong Asia’s 44.7% owned subsidiary, China Yuchai International Ltd (CYD US) is the second-largest engine manufacturer in China. It manufactures and sells engines for trucks, buses passenger vehicles, industrial equipment and agricultural applications. Despite major disruptions due to COVID-19, China Yuchai recorded a 14.4% y-o-y increase in the number of engine units, as a result of the growth in China’s agriculture segment. We expect the earnings of China Yuchai to grow by 17% y-o-y for 2021, as the growth momentum should continue in 2021 from greater buying activity in National VI(a) compliant diesel engines before its full implementation on 1 Jul 21. To tap on the EV market in the longer term, China Yuchai is developing alternative new energy solutions in new generation hybrid power, integrated electric bridge and fuel cell system.
  • Expect robust growth in 2021; restructuring of loss-making segment. Given the strong growth for both the building materials segment and China Yuchai, we expect Hong Leong Asia’s earnings growth to grow 52% y-o-y for 2021. The disposal of the loss-making air-conditioning business, expected to be completed in 1H21, will also provide a further earnings lift and allow management to concentrate on the profitable segments.
  • Attractive valuation given the strong upcycle of both key segments. Our target price of S$1.38 is pegged to 12x 2022F P/E, 1 standard deviation above Hong Leong Asia’s historical five-year average. We think current valuations of 9x 2022F P/E for Hong Leong Asia are attractive, given that both its key segments will ride on an industry uptrend.
  • See Hong Leong Asia Share Price; Hong Leong Asia Target Price; Hong Leong Asia Analyst Reports; Hong Leong Asia Dividend History; Hong Leong Asia Announcements; Hong Leong Asia Latest News.

Share Price Catalysts

GHY Culture & Media (SGX:XJB) – BUY (Lucas Teng, John Cheong)

Share Price Catalysts

  • Events: Resumption of concerts, contract wins for the production of drama series, M&As, wider analyst coverage.
  • Timeline: 3-6 months.

InnoTek (SGX:M14) – BUY (John Cheong)

  • Positive outlook from venturing into the EV and parts assembly business. In the outlook statement of InnoTek’s recent 2020 Annual Report dated 13 Apr 21, InnoTek highlighted that its China's Auto division is experiencing great change, with a clear shift towards electric vehicles (EV). InnoTek’s precision metal components division also serves EV manufacturers. However, as the industry evolves holistically towards charging stations and infrastructure support, InnoTek will seek to deepen its value proposition with existing customers and develop new ones. This means moving beyond single-part manufacturing to parts assembly. InnoTek has secured initial orders of the latter and expects orders to increase as it establishes its foothold within the segment.
  • Set to benefit from a strong recovery in China’s auto sales China has successfully contained the COVID-19 outbreak, and this has led to a surge in passenger vehicle (PV) sales back to pre-COVID-19 levels. CAAM estimated Mar 21 auto sales at 2.38m units, up 67% y-o-y and 64% m-o-m, and 1Q21 PV sales should reach 6.34m units, up 73% y-o-y. InnoTek, which has large exposure to China’s automobile market (historically accounted for > 30% of annual revenue), is set to benefit.
  • New CEO’s successful restructuring initiatives and strong major shareholder backing. InnoTek’s new CEO and Non-Independent Director Lou Yiliang (who joined at end-15) had implemented several restructuring initiatives to boost profitability, including an incentive scheme which rewards employees based on units produced per day and production yield. As a result, InnoTek managed to turn from a net annual loss of S$16.3m in 2015 to decade-high annual net profits of S$20.2m/S$16.7m in 2018/19 respectively.
  • Meanwhile, its gross margins have also increased from 6.5% in 2015 to 24.6% in 2020. As such, InnoTek has become more resilient during economic downturns due to the initiatives. The track record of its major shareholder, the Chandaria family which is involved in the founding of Venture Corporation (Venture), has been underappreciated by the market. Mr Neal Chandaria has been the chairman since 2017 to date, which are InnoTek’s most profitable years.
  • Attractive valuation and balance sheet loaded with cash. Trading at 2022F 9.2x P/E (5x ex-cash 2021F P/E), we opine this is unjustified as InnoTek has the third-best net margins and net cash position among similar Singapore peers. Coupled with the lowest P/B ratio, we believe InnoTek should be trading at a valuation nearer or on a par with its Singapore peers at 2022F P/E of 12.0x. As of end-20, InnoTek had a net cash position of S$92m, up S$72m (+28% y-o-y) vs the level as at end-19, forming around 40% of its current market capitalisation.
  • See InnoTek Share Price; InnoTek Target Price; InnoTek Analyst Reports; InnoTek Dividend History; InnoTek Announcements; InnoTek Latest News.

Share Price Catalysts

  • Better-than-expected demand from automobile segments and winning of more EV customers.
  • Potential takeover target given its attractive ex-cash multiple.
  • Better-than-expected dividend.

Food Empire (SGX:F03) – BUY (Clement Ho)

  • Daily share buy-back underlines confidence in business outlook. Since the start of the buy-back mandate on 23 Apr 20, a total of 3,483,600 shares have been purchased, forming about 0.65% of its outstanding shares. This was mainly carried out in 4Q20 and Jan 21 where Food Empire bought back a total of around 3.0m shares for a consideration of about S$2.0m, potentially signalling a strong confidence in its 2021 business outlook.
  • Compelling valuation. Food Empire trades at an undemanding valuation of 11x 2021F P/E, a significant discount to peers’ average of approximately 25x 2021F P/E despite its growing presence in the Vietnam market and leading position in its core markets in Eastern Europe.
  • 2020 earnings growth amid COVID-19 pandemic reflects resilient product offering and strong brand equity. Given the low price, relatively inelastic and consumer-staple nature of its products, Food Empire is likely to be more resilient and sheltered from an economic slowdown, in our view. Also, we highlight that in spite of the weaker ruble against the US dollar, Food Empire has managed to mitigate some of the adverse impact on the bottom line through ASP hikes and cost management. We are encouraged by Food Empire’s core earnings (ex foreign exchange) growth in 2020 at 14% y-o-y despite stringent lockdowns in 2Q20. We believe this is a testament to its strong brand equity in its core markets that has been developed over many years.
  • See Food Empire Share Price; Food Empire Target Price; Food Empire Analyst Reports; Food Empire Dividend History; Food Empire Announcements; Food Empire Latest News.

Share Price Catalysts

  • Events:
    • Stronger-than-expected recovery in volume consumption and improvement in operating leverage.
    • Potential takeover target given its attractive valuation and distribution network.
  • Timeline: 3-6 months.

Singapore Airlines (SGX:C6L) – SELL (Ajith K)

  • Delay in border re-opening will lead to higher cash burn. As 2Q21 beckons, there are still no signs of border re-openings or the formation of travel bubbles. Instead news flow centres around new variant of COVID-19 and even restrictions on SIA (SGX:C6L)’s flights to Hong Kong. We now believe that border openings would likely be pushed back into late-3Q21 at best and even then it will likely be gradual. Under such a scenario, could even tap into the additional S$6.2b in mandatory convertible bonds, a scenario which the market has not factored in. We have currently assumed that SIA’s pax traffic for FY22 would rebound by 1,100% and amount to 25% of pre-COVID-19 levels. There is downside risk to this estimate. For now, we continue to value SIA at S$4.47, or 1x FY22 & FY23’s average book value.
  • See SIA Share Price; SIA Target Price; SIA Analyst Reports; SIA Dividend History; SIA Announcements; SIA Latest News.

Share Price Catalysts

  • Events: Global vaccination by 3Q21.
  • Timeline: 3-6 months.

OCBC (SGX:O39) – BUY (Jonathan Koh)

  • New CEO, but unchanged focus to expand in Greater Bay Area. Ms Helen Wong is a competent leader with a strong track record, having led HSBC’s Greater China operations, which is the largest profit centre of HSBC. We expect her to focus on expansion in the Greater Bay Area, Sustainable Finance and cross-selling. We look forward to OCBC improving its dividend policy, and with more intensified focus on technology and digitalisation.
  • Guidance points to lower credit costs in 2021. Management expects the NPL ratio to be at the lower end of guidance of 2.5-3.5% for 2020 and 2021. Credit costs are also expected to be at the lower end of guidance of 100-130bp over the two-year period (2020: 67bp). The guidance on credit costs has factored in higher probability of default for loans under moratorium that were extended.
  • Orderly exit from loan relief programmes. OCBC's exposure to loans under moratorium dropped from 9% to 4% of total loans in 4Q20 (expiry in Malaysia) and further declined to 2% of total loans in Jan 21 (expiry in Singapore). 91% of the loans under moratorium of S$5.7b are secured by collateral.
  • Possesses capacity to pay more dividends. CET-1 CAR has improved 0.8ppt q-o-q to 15.2%, which is substantially higher than its target range of 12.5-13.5%. The implementation of an internal ratings-based approach at OCBC Wing Hang has improved OCBC’s CET-1 CAR by 0.5ppt. While OCBC is currently bloated with excess capital, management reassured investors that there are currently no M&A plans under review. Management intends to maintain dividend payout at 40-50%. MAS is expected to announce its guidance on DPS for Singapore banks in May-Jun 21.
  • See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.

Share Price Catalyst

  • Events: OCBC’s dividend yield improving from 4.8% for 2021 to 5.4% for 2022.
  • Timeline: 6-12 months.

SingTel (SGX:Z74) – BUY (Chong Lee Len)

  • Entering digital banking. On 4 Dec 20, the Grab-SingTel (60:40) consortium secured a digital full banking licence from the Monetary Authority of Singapore. We view this positively as it will allow SingTel to stack new business segment to help drive future earnings growth and diversify away from its key mature telecoms assets. In the near term, we see little earnings impact and assume the venture will take 4-5 years to break even. In addition, an initial S$600m equity injection is manageable (raising FY21 net debt/EBITDA from 1.9x to 2x) as we expect SingTel to maintain its dividend mandate. We value the digital banking licence win at 4 cents (or 2% of market capitalisation). This is based on 1x paid-up capital, or a 30% discount to large banks’ mean P/B of 1.45x.
  • Share price appears to have bottomed in Nov 20 when it traded at -1SD below its five-year mean EV/EBITDA. At our target price of S$2.84, SingTel trades at 12.1x FY22F EV/EBITDA (5-year mean EV/EBITDA).
  • Recent 1HFY21 results were weak with core net profit declining 36% y-o-y to S$837m due to a 27% y-o-y decline in National Broadband Network migration revenue and margin compression in its Australia consumer segment and higher net interest expense. India and Africa operations were stronger y-o-y.
  • See SingTel Share Price; SingTel Target Price; SingTel Analyst Reports; SingTel Dividend History; SingTel Announcements; SingTel Latest News.

Share Price Catalysts

  • Events:
    • Rolling out of digital banking licence plans in 1H21,
    • reopening of economies towards end-20/early-21;
    • faster-than-expected recovery in Optus’ consumer and enterprise business.
  • Timeline: 3-6 months.

Ascendas REIT (SGX:A17U) – BUY (Jonathan Koh)

  • Portfolio occupancy edged lower by 1.1ppt q-o-q to 90.6% as of end-Mar 21. Singapore and Australia saw lower occupancies of 1.5ppt and 2.5ppt respectively to 86.9% and 94.9%. All-in weighted average cost of debt improved 9.5ppt to 2.2% while aggregate leverage remains healthy at 38%.
  • Positive rental reversion in 1Q21. Ascendas REIT achieved positive rental reversion of 3% in 1Q21 driven by business & science parks (+2.8%) and logistics & distribution centres (+5.6%) in Singapore and business parks (+6.2%) in the US.
  • Further expansion in Australia and the US. Ascendas REIT completed the acquisition of an 8- storey suburban office building at 254 Wellington Road in Melbourne for S$100.6m in Sep 20. Nissan has leased 65% of the office space to serve as its head office and training centre for 10 years. The suburban office provides NPI yield of 5.8%. Ascendas REIT has also acquired two suburban office properties at Macquarie Park, Sydney MQX4 (completion: mid- 22) and 1-5 Thomas Holt Drive (completion: Jan 21) for total consideration of S$445m. The two suburban office properties provide NPI yield of 6.1% and 5.9% respectively. The acquisition of two office properties in San Francisco 505 Brannan Street and 510 Townsend Street for S$768m and NPI yield of 4.9% was completed in Nov 20.
  • See Ascendas REIT Share Price; Ascendas REIT Target Price; Ascendas REIT Analyst Reports; Ascendas REIT Dividend History; Ascendas REIT Announcements; Ascendas REIT Latest News.

Share Price Catalysts

  • Events:
    • Resiliency from business parks and logistic segments;
    • contributions from development projects and AEIs.
  • Timeline: 6-12 months.

Yangzijiang Shipbuilding (SGX:BS6) – BUY (Adrian Loh)

  • NPAT and margins stronger than expected. Yangzijiang Shipbuilding reported an 89% y-o-y increase in NPAT at RMB780m (26% of our full-year estimate) which was driven by a 10ppt increase in gross-profit margins and an 18ppt increase in net margins. We were not perturbed by revenues that declined 25% y-o-y to RMB2.62b due to lower shipbuilding activites as shipbuilding margins expanded to 14.7% vs 8.4% in 1Q20 which was affected by COVID-19. During the analysts’ briefing, Yangzijiang Shipbuilding’s management reiterated its belief that its revenues will trough in 1Q21 and should increase from 2Q21 onwards.
  • New order win outlook. With slightly over US$4b in new orders garnered year-to-date in 2021, we note that Yangzijiang Shipbuilding’s management is targeting US$5b in new orders which, in our view, should be easily achieved. The company noted that its smallest Changbo yard (to be reactivated by mid-21) will build the smaller 1,000-3,000TEU containerships while the Yangzi and Xinfu yards will focus on the mid-and large-sized vessels. Our 2021 and 2022 new order win expectations remain at US$5.5b and US$3.5b respectively.
  • We believe that YZJ remains a compelling stock for this year as its valuations remain undemanding, with 2021 EV/EBITDA and P/B multiples of 6.0x and 0.8x respectively, a 2022 PEG ratio of 0.31 and net cash of S$0.47/share (or 32% of current Yangzijiang Share Price).
  • See Yangzijiang Share Price; Yangzijiang Target Price; Yangzijiang Analyst Reports; Yangzijiang Dividend History; Yangzijiang Announcements; Yangzijiang Latest News.

Share Price Catalysts

  • Events: New order wins; better returns on its debt investments portfolio.
  • Timeline: 3-6 months.

Far East Hospitality Trust (SGX:Q5T) – BUY (Jonathan Koh)

Share Price Catalyst

  • Event:
    • Downside protection from fixed rents embedded in master leases with sponsor FEO, which owns 61% of Far East Hospitality Trust,
    • recovery in occupancy, average daily rate and RevPAR in 2022
  • Timeline: 6-12 months.

Singapore Research UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-05-05
SGX Stock Analyst Report BUY MAINTAIN BUY 1.380 SAME 1.380