Singapore Stock Alpha Picks (Jul 2021) - UOB Kay Hian 2021-07-02: Adding UMS, Frasers Logistics; Removing Far East Hospitality Trust, Food Empire


Singapore Stock Alpha Picks (Jul 2021) - Adding UMS, Frasers Logistics; Removing Far East Hospitality Trust, Food Empire


Significant outperformance in 2Q21.

  • In 2Q21, the 15.2% q-o-q price-weighted return from our Alpha Picks handily beat the STI’s 1.1% decline.
  • For Jun 21, our relatively flat return of 0.1% m-o-m also outperformed the STI’s 1.1% m-o-m decline, with the portfolio seeing five stocks that outperformed the index and the large majority of the gains coming from Sea Ltd (+13.4% m-o-m) and SGX (+8.2% m-o-m).

Adding Frasers Logistics & Commercial Trust and UMS.

Locking in gains for Far East Hospitality Trust and Food Empire,

Singapore Stock Alpha Picks For July 2021

Frasers Logistics & Commercial Trust (SGX:BUOU) – BUY (Jonathan Koh)

UMS (SGX:558) – BUY (Clement Ho)

  • Supply squeeze from ongoing chip shortage; demand sustainability from capex guidance for multiple years ahead. The global chip shortage situation brought about by rising consumer demand for electronic products and supply disruption has positively impacted UMS’ key client, chip-making equipment producer Applied Materials (AMAT US). Also, in the recent 2QFY21 earnings transcript released by AMAT in May 21, the semiconductor giant disclosed that customers, for the first time, provided capital spending guidance for multiple years ahead, which will be a leading indicator for demand sustainability. This augments our thesis that: the ongoing massive capex spending, and supercycle in the semiconductor industry, will bode well for UMS, lifting overall factory utilisation rates and revenue above the S$200m mark for the first time in 2021 (2010-20 average revenue was S$124m; ranging between S$110 and S$164m).
  • TSMC, Samsung and Intel’s recent comments suggest rising capital spending to last till 2023. Furthermore, global foundry giants Taiwan Semiconductor Manufacturing Company (TSMC), Samsung Electronics and Intel Corp are leading the record spending across the semiconductor industry to capture the “rampaging” chip demand, underpinned by new emerging technologies including 5G, Internet of Things, autonomous driving, and artificial intelligence. For instance, TSMC expects to invest US$100b over the next three years in capital spending, of which a large portion would be channelled towards chip manufacturing equipment, which AMAT’s Endura platform falls under.
  • Positive operating leverage to improve bottom line. The anticipated uplift in utilisation rates from fulfilling wafer-transfer modules for AMAT’s Endura platform is expected to drive positive operating leverage for UMS. While there is no formal disclosure on factory utilisation rates, our channel checks suggest sequentially improving utilisation rates since 1Q20 and they continue to remain elevated. This has also been reflected in the q-o-q sales growth since 1Q20. Our current 2021 revenue estimate of S$205m implies a 24.7% y-o-y growth, translating to core net profit estimate of S$58.4m (+35.1% y-o-y).
  • Maintain BUY with target price of S$1.92, based on 15.1x 2022F P/E, or +2 standard deviation above its historical 4-year average. This is supported by the structural upturn for the semiconductor industry.
  • See
  • Share Price Catalysts: Higher-than-expected factory utilisation rates, better-than-expected cost management.
  • Timeline: 3-6 months.

Sea Limited – BUY (Clement Ho)

  • One of Southeast Asia’s largest Internet companies. Backed by Tencent of China, Sea operates the market-leading Garena and Shopee in Southeast Asia and Taiwan, and is making inroads into Latin America.
  • Digital financial services to be next engine of growth. Branded as SeaMoney, it is licensed to offer electronic money services in Vietnam, Thailand, Indonesia, the Philippines and Malaysia. This segment has expanded beyond the e-wallet service to include consumer lending, which is a natural extension of its e-commerce business.
  • Expanded digital entertainment business to maintain competitiveness. Recent investments show that Sea is seeking to expand and enhance its self-developed hit game Free Fire as a long-term strategy to maintain profitability (by saving on licensing fees).
  • On 31 May 21, we initiated coverage on the stock with a BUY rating. We value the company at US$314.48/share, implying 93x 2021F adjusted operating earnings. The high multiple is in line with the PEG multiples of comparable industry peers, supported by Sea’s 5-year adjusted operating profit CAGR of 50.9% over 2020-25.
  • Share Price Catalysts:
    • Earlier-than-expected reduction in cash burn,
    • Further market share gains for Shopee in their operating regions.
  • Timeline: 3-6 months.

ComfortDelGro (SGX:C52) – BUY (Lucas Teng)

  • Looking forward to recovery. Barring another big cluster of COVID-19 cases, the authorities are on track to bring the local outbreak under control which will likely see a relaxation of COVID-19 restrictions in mid-Jul 21. Preparations for the new normal including expanded vaccinations and testing could also see the return of land transport activities at a faster rate compared with the lifting of the circuit breaker in 2020. A recovery in 2H21 could mitigate a possible short-term impact for ComfortDelGro (SGX:C52) in 2Q21.
  • Value unlocking in Australia. The group also recently announced that it is exploring various options to unlock value of its assets in Australia (including a partial sale of assets or an IPO), where it is one of the largest privately owned bus operators. The group’s total investment in Australia is S$1.17b to date.
  • Limited downside risk. 1Q21 saw overseas buses picking up traction, in the UK and Australia. We are less concerned with Australian operations regarding potential outbreaks, given resilient public transport contracts have kept revenue steady in 2020 (only down 3% y-o-y) despite COVID-19 restrictions. UK operations will likely continue to see a recovery given the high vaccination rates, while we opine that London’s public transport funding will continue to be in place given that the Transport for London recently secured a bailout from the government.
  • See
  • Share Price Catalysts: Lifting of COVID-19 stay home restrictions in Singapore, Unlocking of value in Australia business, Regulatory changes for Downtown Line financing.
  • Timeline: 3-6 months.

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

  • Volatility and hedging needs remain. Trading volume for Singapore Exchange (SGX) remains elevated with 3QFY21 cash equities’ daily average value traded of S$1.52b almost 50% higher compared with FY19 levels. May 21 trading velocity has likely edged up m-o-m given the changes to the MSCI Singapore Index. The group also has a wide range of liquid derivative products in key asset classes such as equities, currencies and commodities, which assure customer stickiness.
  • 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’ valuations. SGX currently trades at 24x FY22F P/E, below peers’ average multiple of 28.0x. New initiatives (eg SPACs, secondary listings) could potentially rerate SGX to trade closer towards its developed markets counterparts of similar size (eg ASX, Japan Exchange Group).
  • See
  • Share Price Catalysts: M&As, Secondary listings of foreign listed entities, Longer-than-expected period of trading volatility.
  • Timeline: 3-6 months.

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

  • Established track record and strong recovery for building materials segment. Hong Leong Asia has been listed in the SGX since 1998 and is part of 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 55% y-o-y for 2021, driven by better sales volume as well as better ASPs for precast and ready-mix concretes as construction activity resumes.
  • Diesel engine segment to benefit from accelerating demand due to a new product version. 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 m-o-mentum should continue in 2021 from greater buying activity in National VI(a) compliant diesel engines before its full implementation on 1 Jul 21.
  • New energy solutions could drive long-term growth, formed partnership on 2 Jun 21 to develop electric vehicles (EV). 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. On 2 Jun 21, China Yuchai formed a partnership with Guangxi Shenlong Automobile Manufacturing to develop new energy vehicles based upon China Yuchai's four new energy powertrain systems including the ISG power generation powertrain (YC IE-Power), e-CVT power-split hybrid powertrain (YC e-CVT), integrated electric drive axel powertrain (YC e-Axel), and a fuel cell system (YC FCS). Both parties will also leverage each other's supply chains and distribution networks, especially in international markets, with a focus on entering into the Southeast Asian markets.
  • Expect robust growth in 2021; restructuring completed for 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 complete in the 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
  • Share Price Catalysts:
    • Earnings surprise due to better-than-expected engine sales and building materials sales.
    • Better-than-expected dividend.
    • Value unlocking activity of China Yuchai International Ltd (CYD US).

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

  • Stellar maiden results. 2020 core earnings surged strongly by 244% y-o-y. Revenue of S$127.1m was up 93% y-o-y while gross margin was 44% (+15ppt) as the group noted strong demand in its drama series. In 2020, GHY Culture & Media had six drama series sold and completed, while two dramas and one online short drama series were in production as at 31 Dec 20.
  • Pipeline with larger-scale projects, higher episode count. GHY Culture & Media has another 13 dramas and one film series to be produced and released progressively through 2021-22. Management also noted that potential drama series produced in 2021 are larger scale projects with higher episode count, which will contribute to sustainable growth and earnings resilience
  • Share purchases and potential M&As. GHY Culture & Media’s CEO Guo Jingyu recently purchased about 0.66m shares at S$0.75/share, accumulating almost 1.74m shares since the company’s listing. Also, the group has net cash of S$105m and is positioned for growth with potential M&As.
  • Valuations still attractive. GHY Culture & Media currently trades at 13x 2021F P/E, below peers’ average of 20x 2021F P/E, while exhibiting stronger earnings growth.
  • See
  • Share Price Catalysts: 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 EV and parts assembly business. In the outlook statement of InnoTek (SGX:M14)’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 EVs. 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 and develop new customers. 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 automobile 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. The China Association of Automobile Manufacturers estimates Mar 21 automobile sales at 2.38m units, up 67% y-o-y and 64% m-o-m, and 1Q21 PV sales should hit 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 Corp (SGX:V03), 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
  • 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.

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

  • Traffic recovery likely to be patchy even in 2022. Slow vaccination rates, lingering COVID-19 cases in Indonesia and resurgence in cases in Australia, two of SIA’s key source markets has dampened hopes of a recovery for 4QFY22.
  • Less optimistic of yield recovery. We have assumed that yields double from pre-pandemic levels in FY22, underpinned by pent-up travel demand, but slow vaccination rates might deter travel and thus airline's pricing power even in FY23.
  • SIA’s S$9.6b in MCBs artificially inflates shareholders’ equity. In effect this has lowered P/B multiples. Unless redeemed, the mandatory convertible bonds (MCB) will amount to S$16.8m upon maturity that would be converted into shares at a conversion price of S$4.84, further diluting shareholders.
  • See
  • Share Price Catalysts: Completion of domestic vaccination by 4Q21.
  • Timeline: 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. New CEO Helen Wong emphasised focus on organic growth from:
    1. capturing investment and trade flows between ASEAN and Greater China,
    2. retail wealth management,
    3. sustainable finance, and
    4. accelerated growth in digitalisation.
  • Maintain guidance. OCBC's management upgraded guidance to mid to high single-digit loan growth for 2021 (2020: +0.5%). NIM is expected to stabilise at 1.50-1.55%. Management expects credit costs to be at the lower end of guidance of 100-130bp over the 2-year period (2020: 67bp).
  • Further reduction of loan relief programmes. Exposure to loans under moratorium dropped by 10.5% from S$5.7b (2.1% of total loans) in Jan 21 to S$5.1b (1.9% of total loans) in Mar 21. 92% of the loans under moratorium are secured by collateral. Most customers indicated they do not require additional assistance.
  • Paying sustainable dividends. OCBC’s CET-1 CAR improved 0.3ppt q-o-q to 15.5% in 1Q21. OCBC estimated that maintaining dividend payout at 40-50% would be able to support growth in risk-weighted assets of 7-8% per year without impeding CET-1 CAR. Management emphasised that dividend policy must be progressive and sustainable. As such, we expect OCBC to gradually increase recurrent regular dividends. Having a high CET-1 CAR also helped OCBC weather unexpected economic shocks, which has been aptly demonstrated amid the COVID-19 pandemic.
  • See
  • Share Price Catalyst: OCBC’s dividend yield improving from 4.0% for 2021 to 4.5% for 2022.
  • Timeline: 6-12 months.

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

  • Positive rental reversion driven by Singapore and the US. Ascendas REIT (SGX:A17U) 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.
  • More acquisitions are forthcoming in 2021. Ascendas REIT secured accretive acquisitions worth S$1.4b in Singapore, Australia and the US in 2020 (completed S$973m in 2020 and S$535m to be completed over the next two years). It has an optimal asset mix 60:40 between Singapore and overseas markets. Having expanded overseas at a frantic pace over the past five years (investment mandate extended to overseas properties in Aug 15), Ascendas REIT could refocus on expanding within Singapore in 2021.
  • Potential acquisitions from sponsor CapitaLand include Ascent at Science Park I (GFA: 555,030sf) and Galaxis (75% stake) at One-North (GFA: 742,050sf). Key tenants at Ascent are Johnson & Johnson, Dyson, Merck and Prestige Biopharma. Key tenants at Galaxis are Canon, Sea Ltd, Oracle and Avaloq.
  • Data centres add a new engine for growth and expansion. Ascendas REIT has completed the acquisition of 11 data centres located across the UK (four), Netherlands (three), France (three) and Switzerland (one) from vendor Digital Realty Trust for S$905m in Mar 21. The acquisition of 11 data centres in Europe has injected a new dimension for growth. There is room for asset enhancements for the 11 data centres via:
    1. repositioning some powered shell data centres into co-location data centres, and
    2. converting ancillary office spaces into data halls.
  • Over the longer term, management intends to build scale for data centres in Singapore and Europe, focusing on core and shell data centres.
  • See
  • Share Price Catalysts:
    • Resiliency from business parks and logistic segments;
    • contributions from development projects and AEIs.
  • Timeline: 6-12 months.

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

  • The new order flow continues. On 30 Jun 21, Yangzijiang Shipbuilding announced new orders worth US$871m comprising:
    1. six 15,000TEU containerships,
    2. three 3,300TEU containerships, and
    3. two 82,300DWT bulk carriers.
  • It was notable that the ultra-large 15,000TEU containership order came from Seaspan, which is one of Yangzijiang's oldest clients. We continue to believe that the containership upcycle appears sustainable as the number of containerships on order is at a 15-year low at only 302 in 2021 year-to-date vs 2005 when 900 of such ships were on order.
  • A record year. Ytd order wins for Yangzijiang Shipbuilding now total US$5.59b for 100 vessels. Given that our previous order win expectation of US$5.5b - and one that we had considered a 'stretch target' in 1Q21 - has already been exceeded, we have upgraded our new order win expectation to US$6.5b for 2021 and US$4.0b for 2022 (previously US$3.5b). Yangzijiang Shipbuilding's orderbook now stands at US$7.72b for 160 vessels.
  • We believe that Yangzijiang Shipbuilding remains a compelling stock for this year as its valuations remain undemanding, with 2021 EV/EBITDA and P/B multiples of 5.6x and 0.7x respectively, a 2022 PEG ratio of 0.21 and net cash of S$0.47/share (or 33% of current Yangzijiang's Share Price).
  • See
  • Share Price Catalysts: New order wins; better returns on its debt investments portfolio; strong 1H21 results.
  • Timeline: 3-6 months.

Singapore Research UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-07-02
SGX Stock Analyst Report BUY MAINTAIN BUY 1.900 SAME 1.900