Singapore Stock Alpha Picks (Aug 2021) - UOB Kay Hian 2021-08-04: Adding Genting Singapore, Removing GHY Culture


Singapore Stock Alpha Picks (Aug 2021) - Adding Genting Singapore, Removing GHY Culture

What's new for Singapore stock alpha picks

  • Flat performance in July. On both price-and market cap-weighted basis, our Alpha Picks portfolio rose 1.3% and 1.5% respectively and was in line with the STI’s 1.2% m-o-m increase. While the portfolio saw seven stocks outperform the index, with a broad range of stocks in different sectors doing well, some of the outperformance was undone by GHY Culture & Media (SGX:XJB) (-11.1%) which was negatively affected by the worsening COVID-19 situation in Malaysia, as well as Hong Leong Asia (SGX:H22) and InnoTek (SGX:M14) (both -5.8% m-o-m).
  • Adding Genting Singapore and removing GHY Culture. For August, we have added Genting Singapore (SGX:G13) as we believe that the market will eventually price in earnings recovery in 4Q21, backed by a prospective yield of > 4%. We remove GHY Culture & Media (SGX:XJB) given its underperformance caused by the lockdown measures in Malaysia, which affected filming production. We still like the group’s recovery prospects from concert productions but will opt to revisit it with better visibility on resumption in activities.

Genting Singapore (SGX:G13) – BUY (Vincent Khoo, Jack Goh)

  • Market will eventually price in 2022 recovery. Genting Singapore (SGX:G13) is a major direct beneficiary of Singapore’s COVID-19 national vaccination programme and the reopening of the economy. With hopes riding high on the global dispensation of the vaccines in 2021 which will allow the government to achieve its plan to inoculate 5.7m citizens by 3Q21 and achieve herd immunity, we believe that valuations will partially factor in Genting Singapore’s return to pre-pandemic earnings dynamics.
  • Hopes of more travel corridors opened upon herd immunity. With the government eyeing the resumption of some international travel by Sep 21 and the promise of easier travel for vaccinated tourists, we expect more reciprocal green lane (RGL) and travel arrangements with neighbouring countries in 4Q21 which will eventually benefit Genting Singapore as international patronage rebounds.
  • Lush prospective yields. We expect Genting Singapore’s dividend yield to normalise to 4.1% in 2022, assuming revenue and cash flows recover back to pre-pandemic levels. Meanwhile, we also expect Genting Singapore to deliver significantly better dividends in 2H21. Theoretically, our projected 2021 after tax EBITDA is sufficient to fund a dividend of S$0.035 (4.1% yield).
  • See

Genting Singapore's share price catalysts

  • Wide dispensation of COVID-19 vaccines which will allow herd immunity.
  • Initiation of green lane travel arrangements or travel bubbles between Singapore and neighbouring countries.
  • Appealing 2022 yield of > 4%.

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

Frasers Logistics & Commercial Trust's share price catalysts:

  • Growth of e-commerce in Australia and Germany;
  • Compression of cap rates for logistics properties leading to sizeable revaluation gains; and
  • Continued expansion by tapping on sponsor’s pipeline.
  • Timeline: 6-12 months.

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 (SGX:558)’s 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).
  • Recent comments from TSMC, Samsung and Intel 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 will 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 a 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

UMS's 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 Limited (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 the 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 e-wallet services 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.

Sea Limited's 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. Singapore is set to see a relaxation of COVID-19 restrictions in mid-Aug 21, such as the lifting of dine-in restrictions. With a sizeable proportion of the population vaccinated, this could also see the return of land transport activities at a faster rate compared to 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. Australia has since seen an increase in COVID-19 cases, though public transport schedules will unlikely see a large decline. UK operations will likely continue to see a recovery given the high vaccination rates, while we think 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

ComfortDelgro's 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.

SGX (SGX:S68) – BUY (Lucas Teng)

  • Volatility remains; Building up multi asset exchange. Trading volume for SGX (SGX:S68) remains elevated with FY21 cash equities’ daily average value (DAV) trading at S$1.35b, higher on a y-o-y basis. The group also recently acquired MaxxTrader, a leading provider of Forex pricing and risk solutions, further growing SGX’s Forex business segment and building upon its advantage as a multi asset exchange.
  • 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 peer’s valuation. SGX currently trades at 27x FY22F P/E, below peers’ average multiple of 28.0x. New initiatives (e.g. SPACs, secondary listings) could re-rate SGX to trade closer towards its developed markets counterparts of similar size (e.g. ASX, Japan Exchange Group).
  • See

SGX's 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 (SGX:H22) 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 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, and 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.
  • New energy solutions could drive long-term growth. To tap into 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 of 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 to grow 52% y-o-y for 2021. The disposal of the loss-making air-conditioning business which is expected to complete 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's 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).

InnoTek (SGX:M14) – BUY (John Cheong)

  • Positive outlook from venturing into the 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 electric vehicles (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 customers and acquire new customers. This means moving beyond single-part manufacturing to parts assembly. InnoTek has secured initial orders of the latter and expect 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. 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 9.2x 2022F P/E (5x ex-cash 2021F P/E), we think 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's 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.

SIA (SGX:C6L) – HOLD (Ajith K)

  • 38% q-o-q reduction in losses came about from higher cargo revenue and not incremental pax carriage. In 1QFY22, SIA (SGX:C6L)’s incremental pax traffic led to lower revenue due to a q-o-q decline in pax yields. Thus SIA’s ability to generate incremental earnings on passenger flights over the next two quarters is highly dependent on continued strong bellyhold cargo demand.
  • Valuation multiples likely to normalise by early-22. At the current level, SIA is trading at about 1.17x FY21 and FY23’s adjusted book value (ex-mandatory convertible bonds). Historically, SIA traded at about 0.9x book value.
  • See

SIA's share price catalysts

  • Events: 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. OCBC (SGX:O39)'s 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. 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 that they do not require additional assistance.
  • Paying sustainable dividends. OCBC’ 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 pandemic.
  • See

OCBC's share price catalyst

  • Events: 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 6.4% in 1H21 (1Q21: 3%, 2Q21: 8.9%). In Singapore, business space, high-specifications industrial buildings & data centres and logistics & distribution centres provided healthy reversions of +3.7%, +4.8% and +4.9% respectively. Business parks in the US registered strong reversions of +26.3% driven by Raleigh (biomedical tenant) and San Diego (defence industry). Management expects positive low single-digit rental reversions for 2021.
  • 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 of 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

Ascendas REIT's share price catalysts

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

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

  • The new order flow continues. Yangzijiang Shipbuilding (SGX:BS6) continues to win orders at an amazing pace with July seeing another US$1.08b in new orders for 12 vessels, of which ten were for containerships. In addition, the company disclosed a further order worth US$0.5b for five containerships which has yet to become effective. Importantly, these containerships are dual-fuel vessels which imply that Korean shipyards’ stranglehold on this valuable segment of the market is effectively over.
  • A record year. Year-to-date order wins for Yangzijiang Shipbuilding stand at a total of US$7.17b for 117 vessels if we include the order wins mentioned above. Our previous order win expectation of US$6.5b has already been obliterated and we will look to upgrade both earnings as well as order win expectations post its upcoming 1H21 results (to be reported on 13 Aug 21). Yangzijiang Shipbuilding's orderbook now stands at US$8.74b for 170 vessels.
  • We believe that Yangzijiang Shipbuilding remains compelling as its valuations remain undemanding, with 2021 EV/EBITDA and P/B multiples of 5.5x and 0.7x respectively, a 2022 PEG ratio of 0.2 and net cash of S$0.47/share (or 33% of its current share price).
  • See

Yangzijiang Shipbuilding's share price catalysts

  • Events: New order wins; better returns on its debt investments portfolio; strong 1H21 results.
  • Timeline: 3 months.

Singapore Research UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-08-04
SGX Stock Analyst Report BUY MAINTAIN BUY 1.90 SAME 1.90