Singapore Market Strategy - UOB Kay Hian 2022-03-22: Impact Of China’s Resurgent COVID-19 Situation

ASCOTT RESIDENCE TRUST (SGX:HMN)

Singapore Market Strategy - Impact Of China’s Resurgent COVID-19 Situation

While there are 8 Singapore companies under our coverage with > 70% revenue exposure to China, we have not made any changes to our 2022 earnings estimates yet. The downside risk involves the Chinese government clamping down harder on the economy in furtherance of its zero-COVID strategy.
Despite being the region’s best performing index, the STI’s current valuations remain undemanding, trading at a 2022 P/E and P/B of 13.5x and 1.1x, with the highest yield in the region at 4.1%.

With sustained outbreaks in two-thirds of the country’s provinces, China’s zero-tolerance policy towards COVID-19 is now facing its toughest test yet since the coronavirus first emerged more than two years ago in Wuhan. The contrast is especially stark in relation to much of the rest of the world which is progressing towards easing restrictions or in the case of Singapore, “streamlining” COVID-19 measures.

As in prior periods of market uncertainty, investors tend to “sell first and ask questions later”, especially in an environment where newsflow appears to be overwhelmingly negative: the Russian invasion of Ukraine, inflation concerns for both soft and hard commodities, Fed rate increases, and increased policy risks in the Chinese technology sector, to name a few.

In the report attached below, we have detailed the companies under our coverage that have meaningful exposure to China and thus could see their 2022 profitability come under pressure should the country’s zero-COVID policy result in business stoppage or interruption.
Companies with > 70% of revenue derived from China include

At this early stage, we have not made any changes to our earnings forecasts as we believe that the impact at present would be mild. For 2022, we forecast 10.7% y-o-y earnings growth for the combined large cap and REITs sectors, excluding the aviation sector (under review). Downside risks to our earnings estimates include new variants of the coronavirus which are more lethal and infectious than expected.
Strong economic data from China, but a cloudy outlook. China’s Jan-Feb data (released on 15 Mar 22) was surprisingly strong, which suggests that the policy easing measures are working. However, the Russia-Ukraine conflict and the worsening domestic pandemic may warrant a more cautious outlook as the country’s “dynamic zero-COVID” policy will impose significant costs to the economy. The question is now the extent of lockdown in terms of the number of cities and duration of the lockdown.
Our top large-cap picks for the Singapore market are

We highlight that the Russia-Ukraine conflict and worsening domestic pandemic issues has led the UOB Global Economics and Markets Research (GEMR) team to lower its growth forecast for China to 4.9% for 2022 from its previous forecast of 5.2%. It expects the impact of the lockdowns and higher commodity prices to affect 1H22 GDP and thus is forecasting 4.5% y-o-y growth for 1H22 before picking up to 5.2% y-o-y growth in 2H22.

Despite being the region’s best performing index, the STI’s current valuations remain undemanding, trading at a 2022 P/E and P/B of 13.5x and 1.1x respectively, while paying the region’s highest yield at 4.1%. The STI is trading at 0.5x below its long-term average P/E while on a P/B basis, it is 1.0 standard deviation below the long-term average.

Singapore Research UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-03-22

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