YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)
DBS GROUP HOLDINGS LTD (SGX:D05)
OVERSEA-CHINESE BANKING CORP (SGX:O39)
Singapore Strategy - Imminent Changes To MSCI Singapore Weightings
- From 1 Sep 21, Sea Limited’s weighting within the MSCI Singapore index will increase from 2.5% to 11.0% which we believe will see more ETF-related buying of the stock. The unfortunate ramification is that funds will sell out of the largest constituents which include DBS, OCBC, UOB, and SingTel. We also highlight that Yangzijiang's share price strength (+68% year-to-date) may potentially see its re-inclusion in the near to medium term.
Foreign listed companies now allowed into the MSCI Singapore indexes
- .On 10 Nov 20, MSCI announced that Singapore had met the Foreign Listing Materiality Requirements at the Nov 20 Semi Annual Index Review (SAIR) and thus foreign listings were allowed into the MSCI Singapore indexes starting from the May 2021 SAIR, with Sea (SE US/BUY/Target: US$370.76) being the first company to be admitted.
- As profiled in our prior report dated 26 Mar 21, Sea has and will continue to cause the most disruption. Currently, Sea has a 2.5% weight in the MSCI Singapore Index; however this will increase to over 11% from 1 Sep 21 as its inclusion factor will rise from 5% of its free-float adjusted market capitalisation to 25%.
- Near-to medium-term dates to watch out for. In the near term, the next date to watch out for is towards the end of Nov 21 when Sea’s inclusion factor increases to 50% post MSCI’s SAIR, and then rising to full 100% inclusion at the Feb 22 Quarterly Index Review. Note that Sea will also be included into the MSCI Asean and MSCI Asia ex-Japan indices; however these impacts will be much less compared to MSCI Singapore.
- Funds will have to continue to actively buy Sea. Since our initial report on Sea’s inclusion into the MSCI Singapore, the company’s share price has risen by 59% and outperformed the STI (-1.4% in US$ terms), MSCI World (+12.1%) and MSCI Asia ex Japan (-4.3%). all index benchmarks globally. While passive funds tracking the MSCI Singapore, ASEAN and Asia ex-Japan indices will have to buy Sea, we believe that many active Asian and global emerging markets funds do not hold a position in the company and thus will need compelling reasons not to buy, otherwise they may lose out on performance versus benchmarks.
Impact On Singapore Stocks
- Financials will be hit the hardest. On a sector basis, financials will be hit the hardest given that the three Singapore banks have the largest weighting within the MSCI Singapore index at 51.1%. At current prices, DBS (SGX:D05) will witness the largest impact with its weight expected to fall around 7.1bp between the current weighting to Feb 22 review, while OCBC (SGX:O39) and UOB (SGX:U11) will decline by 5.0bp and 3.9bp respectively. For more details, please see table in the PDF report attached below.
- Yangzijiang (YZJ): A potential inclusion? With a free-float adjusted market capitalisation of S$4.53b, Yangzijiang Shipbuilding (SGX:BS6) is currently larger than the 17th-19th largest companies on the 19-member MSCI Singapore index. As a reminder, Yangzijiang Shipbuilding was removed from the index in Nov 20 when its share price was 45-50% lower than present.
STOCK IDEAS
Sea’s 2Q21 results were strong – target price upgraded by 18% to US$370.76
- The highlight of Sea’s results was its 2Q21 GAAP-revenue of US$2.28b (+158.6% y-o-y, +29.3% q-o-q) which surpassed our estimate, led by higher-than-expected bookings from its self-developed hit, Free Fire. Post results, we raised our 2021 revenue estimates by 10% to US$8.59b, in line with the stronger guidance from management for both its digital entertainment and e-commerce businesses. We rate Sea as a BUY, and had upgraded our target price to US$370.76 post-results, based on a blended PEG average of peers. The implied 2021F adjusted operating income of 73.5x, which excludes sales & marketing and R&D expenses for more effective comparison, is supported by Sea’s 5-year adjusted operating profit CAGR of 52.7% over 2020-25.
Yangzijiang Shipbuilding reported a strong 1H21 result – target price upgraded by 5% to S$2.00.
- Yangzijiang Shipbuilding reported a 39% y-o-y increase in net profit with positive guidance for margins for the next 6-12 months as it has already started to build its high-margin containership orders. While China steel prices have only fallen 5% in the past month, we highlight that iron ore prices have collapsed 27% in the same period which could drag down steel prices in the near term.
- Post its strong 1H21 results and solid outlook, we upgraded our PE-based target price for Yangzijiang Shipbuilding to S$2.00. At our target price, Yangzijiang Shipbuilding would trade at a P/B of 1x which we think is fair.
- We continue to believe that Yangzijiang Shipbuilding remains inexpensive as it is trading at 2022 multiples of 6.8x P/E and 0.7x P/B. We highlight that end-1H21 potential net cash per share (i.e. net cash plus debt investments) is S$0.81 which equates to 54% of Yangzijiang's share price.
Adrian LOH
UOB Kay Hian Research
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Singapore Research Team
UOB Kay Hian
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https://research.uobkayhian.com/
2021-08-30
SGX Stock
Analyst Report
2.000
SAME
2.000
35.800
SAME
35.800
15.650
SAME
15.650
