Singapore Stock Strategy - UOB Kay Hian 2022-11-14: An Unexpected Singles’ Day Present From China

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Singapore Stock Strategy - An Unexpected Singles’ Day Present From China

China unexpectedly delivered a Singles’ Day present in announcing an adjustment to its COVID-19 pandemic control measures. While the measures may be small at present, it is important that the Chinese government is signalling that it is taking preliminary steps to re-open the economy. This could have medium-to long-term positive ramifications on Singapore-listed stocks.
SGX listed stocks with meaningful exposure to China include CapitaLand Ascott Trust, CapitaLand Investment, DFI Retail Group, Keppel Corp, Raffles Medical, Sasseur REIT, Sembcorp, SIA, Wilmar and Yangzijiang Shipbuilding.

China updated its “scientific and accurate pandemic control policies” on 11 Nov 22, making adjustments to 20 measures related to COVID-19. While the Chinese authorities have explicitly emphasised that these adjustments do not mean opening up, or any material change to the “Dynamic Zero COVID-19” overarching goal, we view these developments as a positive signal that the Chinese government is working towards an eventual re-opening.
Further progress needs to be made in three key areas. In our view, three pre-conditions need to be satisfied for China to fully re-open its economy. These include:
1. increase in domestic vaccine coverage,
2. increased coverage of the broad community with medical resources, and
3. shift in the Chinese government’s tone towards COVID-19 to reduce citizens’ fears towards the virus.
Within our coverage universe, a number of stocks have material exposure to China, either from ownership of assets and/or derive a meaningful proportion of their profits from China. These stocks include
Within the small/mid-cap sector, tech stocks such as Aztech (SGX:8AZ), Frencken (SGX:E28) and NanoFilm (SGX:MZH) either have clients or manufacturing facilities in China, while companies such as China Sunsine (SGX:QES) and Jiutian Chemical (SGX:C8R) derive the majority of their profits from China.

Compared to six months ago, we have moderated our 2022 growth forecast from 22% y-o-y to 18% y-o-y for our coverage universe of the Singapore market, and for 2023 we have lowered it from 9% y-o-y to 6% y-o-y.
The aggregate 6% EPS growth in 2023 is with financials and land transports leading the way. While we continue to expect the aviation sector to see y-o-y earnings decline in 2023, earlier-than-expected expansion of air travel into China could see a re-rating of the sector although actual earnings uplift may take time to eventuate.
This takes into account more realistic assumptions regarding the inflationary effects that will likely impact the market and the economy this year and thus we believe that our earnings estimates are not overly optimistic.
2023 valuations for the STI remain inexpensive, with the STI trading at a forecast 2023 P/E and P/B of 12.0x and 1.1x respectively, and paying a yield of 4.5%. We highlight that these multiples are meaningful discounts to the STI’s long-term averages.
Potential downside risk in 2023 earnings could arise if:
1. higher-than-expected commodity prices, especially oil, throttle the nascent economic recovery, and
2. the US Fed raises interest rates too aggressively to contain inflation and cause a recession as a result – we note that probability forecasts for recession risks have risen significantly in the US and EU which will negatively affect Singapore.

Adrian LOH UOB Kay Hian Research | Singapore Research Team UOB Kay Hian | https://research.uobkayhian.com/ 2022-11-14